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How To Modernize And Improve The System Of Insurance Regulation In The United States

Table of Contents

I. INTRODUCTION .................................................................................................................1

Structure of the Report......................................................................................................4

Recommendations for Modernization of Insurance Regulation 

in the United States ...........................................................................................................5

Areas of Near-Term Reform for the States........................................................................6

Areas for Direct Federal Involvement in Regulation.......................................................7

Potential Federal Solutions to States’ Failure to Modernize and Improve ....................8

II. A BRIEF HISTORY OF THE REGULATION OF THE 

 UNITED STATES INSURANCE INDUSTRY .................................................................11

Early Era of Insurance Regulation and the Limitation on Federal Authority..............11

Box 1: The National Association of Insurance Commissioners (NAIC)..................11

Early Calls for Federal Regulation of Insurance ...........................................................13

The Case of South-Eastern Underwriters, Federal Authority to 

Regulate Insurance, and the McCarran-Ferguson Act...................................................14

The Crises of Insurer Insolvencies, Congressional Reaction, 

and State Regulatory Responses......................................................................................15

Recent Proposals for Federal Regulation of Insurance to Promote Uniformity..........16

The Financial Crisis..........................................................................................................18

Box 2: AIG....................................................................................................................18

Box 3: Assistance to the Insurance Industry during the Financial Crisis.................20

Financial Regulatory Reform ..........................................................................................21

III. PRUDENTIAL OVERSIGHT...........................................................................................23

The Solvency Framework.................................................................................................23

Box 4: Europe’s Insurance Regulatory Regime – Solvency II...................................26

Capital Standards .............................................................................................................28

Box 5: Credit Rating Agencies, Financial Guaranty Insurance, 

and the Financial Crisis...............................................................................................30

Reserving ..........................................................................................................................35

Credit for Reinsurance ...................................................................................................37

Corporate Governance – Director and Officer Suitability and Fitness.........................38

Group Supervision ...........................................................................................................39

Resolution of Insolvent Insurers ....................................................................................42
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How To Modernize And Improve The System Of Insurance Regulation In The United States

Receivership .....................................................................................................................43

Guaranty Funds................................................................................................................44

IV. MARKETPLACE OVERSIGHT, CONSUMER PROTECTION AND ACCESS TO 

INSURANCE .....................................................................................................................46

Producer Licensing .........................................................................................................46

Box 6: Marriage and Insurance ................................................................................48

Product Approval .............................................................................................................48

Box 7: Personal Auto Policies for Service Members .................................................49

Box 8: Sale of Annuities to Suitable Consumers .....................................................51

Market Conduct Regulation............................................................................................52

Rate Regulation................................................................................................................54

Box 9: Forms of Rate Regulation................................................................................55

Risk Classification.............................................................................................................56

Box 10: Access of Native Americans to Insurance.....................................................57

Nonadmitted and Reinsurance Reform Act of 2010 ....................................................58

Natural Catastrophes .......................................................................................................59

V. TAKING ACCOUNT OF REGULATORY REFORM .......................................................62

VI. CONCLUSION..................................................................................................................65
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How To Modernize And Improve The System Of Insurance Regulation In The United States

Glossary of Acronyms

Actuarial Guideline 38 .......................................................................................................................................AG 38

AIG Financial Products....................................................................................................................................AIG FP

AIG Securities Lending Corporation ...........................................................................................................AIGSLC

American Council of Life Insurers....................................................................................................................ACLI

American International Group, Inc .................................................................................................................... AIG

Board of Governors of the Federal Reserve System.......................................................................Federal Reserve

California Earthquake Authority ................................................................................................................Authority 

Capital Purchase Program....................................................................................................................................CPP

Commercial Paper Funding Facility..................................................................................................................CPFF

Common Framework for the Supervision of Internationally Active Insurance Groups...................ComFrame

Consumer Financial Protection Bureau ...........................................................................................................CFPB

Council of Insurance Agents and Brokers........................................................................................................CIAB

Credit Default Swap...............................................................................................................................................CDS

Credit Rating Agencies........................................................................................................................................CRAs

Defense of Marriage Act ..................................................................................................................................DOMA

Department of Housing and Urban Development .........................................................................................HUD

Department of the Treasury ..........................................................................................................................Treasury

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010....................................Dodd-Frank Act

European Insurance and Occupational Pensions Authority....................................................................... EIOPA

European Union......................................................................................................................................................EU

Federal Deposit Insurance Corporation...........................................................................................................FDIC

Federal Emergency Management Agency ......................................................................................................FEMA

Federal Insurance Office .......................................................................................................................................FIO

Federal Insurance Office Act of 2010............................................................................................................FIO Act

Financial Analysis Working Group................................................................................................................... FAWG

Financial Stability Assessment Program............................................................................................................ FSAP

Financial Stability Board ........................................................................................................................................FSB

Financial Stability Committee .............................................................................................................................. FSC

Financial Stability Oversight Council ............................................................................................................Council

Global Receivership Information Database..................................................................................................... GRID

Global Systemically Important Insurers...........................................................................................................G-SIIs

Government Accountability Office.................................................................................................................... GAO

Government Sponsored Enterprises................................................................................................................. GSEs

Gramm-Leach-Bliley Act....................................................................................................................................GLBA

International Association of Insurance Supervisors..........................................................................................IAIS

International Monetary Fund...............................................................................................................................IMF

Interstate Insurance Product Regulation Commission..................................................................................IIPRC

Life and Health..................................................................................................................................................... L/H

National Association of Insurance Commissioners .........................................................................................NAIC

NAIC Credit for Reinsurance Model Law and Regulation................................................. Model Collateral Law

NAIC Financial Regulation Standards Accreditation Program........................................Accreditation Program

NAIC Model Insurance Holding Company System Regulatory Act 

and Regulation...........................................................................................................Holding Company Model Act

NAIC Suitability in Annuity Transactions Model Regulation.................................Model Suitability Regulation

National Association of Registered Agents and Brokers.............................................................................NARAB

National Conference of Insurance Guaranty Funds ....................................................................................NCIGF

National Flood Insurance Program................................................................................................................... NFIP
National Insurance Producer Registry ..............................................................................................................NIPR

National Organization of Life & Health Insurance Guaranty Associations..........................................NOLHGA

New York Department of Financial Services..................................................................................................NYDFS

Non-admitted and Reinsurance Reform Act.................................................................................................. NRRA

Office of Thrift Supervision................................................................................................................................. OTS

Own Risk and Solvency Assessment..................................................................................................................ORSA

Principles Based Reserving...................................................................................................................................PBR

Producer Licensing Model Act ........................................................................................................................ PLMA

Property and Casualty............................................................................................................................................P/C 

Qualified Financial Contracts.............................................................................................................................QFCs

Quantitative Capital Standard............................................................................................................................. QCS

Residential Mortgage Backed Securities..........................................................................................................RMBS

Risk-based capital.................................................................................................................................................. RBC

Secretary of the Treasury ............................................................................................................................. Secretary 

Securities and Exchange Commission ................................................................................................................SEC

Securities Valuation Office .................................................................................................................................. SVO

Solvency Modernization Initiative........................................................................................................................ SMI

Special Purpose Vehicle ........................................................................................................................................ SPV

Standard Valuation Law........................................................................................................................................ SVL

Statutory accounting principles........................................................................................................................... SAP

State Modernization and Regulatory Transparency Act ...................................................................... SMART Act

System for Electronic Rate and Form Filing...................................................................................................SERFF

Term Asset-Backed Auction Loan Facility.........................................................................................................TALF

Terrorism Risk Insurance Act.............................................................................................................................TRIA

United States Trade Representative..................................................................................................................USTR 

Value at Risk ............................................................................................................................................................VaR
I. INTRODUCTION

By any measure, insurance is a significant sector of the U.S. economy. Insurance premiums in the life and 

health (L/H) and property and casualty (P/C) insurance sectors totaled more than $1.1 trillion in 2012,1 or 

approximately 7 percent of gross domestic product.2 In the United States, insurers directly employ approximately 2.3 million people, or 1.7 percent of nonfarm payrolls.3

 More than 2.3 million licensed insurance 

agents and brokers hold more than 6 million licenses.4 Moreover, as of year-end 2012, the L/H and P/C 

sectors reported $7.3 trillion in total assets5

 – roughly half the size of total assets held by insured depository 

institutions.6 Of the $7.3 trillion in total assets, $6.8 trillion were invested assets.7

The business of insurance in the United States is primarily regulated at the state level. Insurance laws are 

enacted by state legislators and governors and are implemented and enforced by state regulators. Broadly 

speaking, state regulation is divided into prudential regulation (frequently referred to as “solvency” regulation) and marketplace regulation. Prudential regulation consists of oversight of an insurer’s financial 

condition and its ability to satisfy policyholder claims. Marketplace regulation governs an insurer’s business 

conduct, such as the pricing of premiums, advertising, minimum standards governing the terms of insurance policies, licensing of insurance agents and brokers (producers), together with general issues of consumer protection and access to insurance. 

Although reforms to solvency and marketplace regulation are continually discussed, for over a century a 

centerpiece of the debate among policymakers and industry leaders over modernizing insurance regulation 

has been the extent to which the federal government should be involved in insurance regulation. These 

conversations have generally focused on the question of whether a state-based system can answer the regulatory demands of a national, and increasingly global, insurance market. Proponents of modernizing 

insurance regulation through federal involvement have noted that the current state-based system does not 

impose the uniformity necessary for the U.S. insurance market to function efficiently. They explain that 

state regulation is often duplicative or inconsistent, that the multiplicity of jurisdictions makes state regulators more prone to “capture,” and that differences in standards between the states provide opportunities for 

arbitrage, if not a race to the bottom. Moreover, proponents of federal involvement contend that limitations 

on the jurisdictional reach of states’ legal authority impede effective regulation of entities whose businesses 

span multiple jurisdictions and sectors. 

Those who favor continuation of the current regime of state regulation counter that much of the business of 

insurance is local in nature and generally does not lend itself to uniform national regulation, and that states 

are better positioned to respond to consumer complaints. They add that mechanisms for cooperation and 

achieving uniformity already exist among the states, and that a state-based system provides better opportuni1 SNL Financial LC (April 25, 2013). 

2 See Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov/national/index.htm#gdp 

(reporting – via the “Current-dollar and ‘real’ GDP” hyperlink – 2012 nominal GDP of $15,684.8 billion). 

3 Department of Labor, Bureau of Labor Statistics, http://data.bls.gov/timeseries/CES5552400001?data_

tool=XGtable (data extracted on April 5, 2013). 

4 National Insurance Producer Registry (NIPR), 2012 Annual Report, 9, available at http://www.nipr.com/documents/2012_NIPR_Annual_Report.pdf. 

5 SNL Financial LC (April 25, 2013).

6 Federal Deposit Insurance Corporation (FDIC), Quarterly Banking Profile, 7 (Fourth Quarter 2012), available 

at http://www2.fdic.gov/qbp/2012dec/qbp.pdf (reporting $14.5 trillion of total assets held by FDIC-insured institutions.

7 SNL Financial LC (April 25, 2013) (the $6.8 trillion of invested assets includes separate account assets held 

by L/H insurers). 
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How To Modernize And Improve The System Of Insurance Regulation In The United States

ties for experimentation so that the best ideas developed in one jurisdiction can be adopted and replicated in 

others. They also assert that, by and large, state regulation works well. 

By drawing attention to the supervision of diversified complex financial institutions such as American 

International Group, Inc. (AIG), the financial crisis added another dimension to the debate on regulating 

the insurance industry. The crisis demonstrated that insurers, many of which are large, complex, and global 

in reach, are integrated into the broader U.S. financial system and that insurers operating within a group 

may engage in practices that can cause or transmit severe distress to and through the financial system. AIG’s 

near-collapse revealed that, despite having several functional regulators, a single regulator did not exercise 

the responsibility for understanding and supervising the enterprise as a whole.8

 The damage to the broader 

economy and to the financial system caused by the financial crisis underscored the need to supervise firms 

on a consolidated basis, to improve safety and soundness standards so as to make firms less susceptible to 

financial shocks, and to better understand and regulate interconnections between financial companies.9

 

As part of the federal government’s response to the financial crisis, Congress passed and President Obama 

signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (Pub. 

L. 111-203) in July 2010. The Dodd-Frank Act established the Financial Stability Oversight Council (Council), which has the responsibility for monitoring emerging risks to the U.S. financial system and has the 

authority to determine that nonbank financial companies shall be subject to supervision by the Board of 

Governors of the Federal Reserve System (Federal Reserve) and prudential standards. Subtitle A of Title V 

of the Dodd-Frank Act, entitled the Federal Insurance Office Act of 2010 (31 U.S.C. §§ 313-14) (FIO Act), 

established the Federal Insurance Office (FIO) in the U.S. Department of the Treasury (Treasury). The 

statute provides FIO with the following authorities: 

1. Monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the 

United States financial system;

2. Monitor the extent to which traditionally underserved communities and consumers, minorities, 

and low- and moderate-income persons have access to affordable insurance products regarding all 

lines of insurance, except health insurance;

3. Recommend to the Council that it designate an insurer, including the affiliates of such insurer, as 

an entity subject to regulation as a nonbank financial company supervised by the Federal Reserve;

4. Assist the Secretary of the Treasury (the Secretary) in administering the Terrorism Insurance Program established in the Treasury under the Terrorism Risk Insurance Act of 2002;

5. Coordinate Federal efforts and develop Federal policy on prudential aspects of international 

insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors (IAIS) and assisting the Secretary in negotiating 

covered agreements;10

8 AIG was regulated at the holding company level by the former Office of Thrift Supervision. 

9 For discussion of consolidated supervision of U.S. insurance groups, see: IMF, United States: Publication 

of Financial Sector Assessment Program Documentation — Detailed Assessment of Observance of IAIS Insurance Core 

Principles (2010).

10 In the FIO Act, 31 U.S.C. § 313(r)(2), a “covered agreement” is defined as a “bilateral or multilateral agreement regarding prudential measures with respect to the business of insurance or reinsurance that – (A) is 

entered into between the United States and one or more foreign governments, authorities, or regulator 

entities; and (B) relates to the recognition of prudential measures with respect to the business of insurance 

or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under State insurance or reinsurance regulation.”
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How To Modernize And Improve The System Of Insurance Regulation In The United States

6. Determine whether State insurance measures are preempted by covered agreements;

7. Consult with the States (including State insurance regulators) regarding insurance matters of national importance and prudential insurance matters of international importance; and

8. Perform such other related duties and authorities as may be assigned to FIO by the Secretary.

In addition, the Dodd-Frank Act assigns certain duties to the Director of FIO. Pursuant to Title I of the 

Dodd-Frank Act, the Director serves as a nonvoting member of the Council. Under Title II, the affirmative 

approval of the Director, along with a vote of two-thirds of the Governors of the Federal Reserve, is required 

before the Secretary may make a determination on whether to seek the appointment of the Federal Deposit 

Insurance Corporation (FDIC) as receiver of an insurance company. 

Title V of the Dodd-Frank Act also requires the FIO Director to “conduct a study and submit a report to 

Congress on how to modernize and improve the system of insurance regulation in the United States.”11 This 

Report responds to the Congressional directive. 

To support this study and Report, FIO has consulted extensively with various stakeholders. On October 17, 

2011, FIO published a notice in the Federal Register asking the public to submit comments on the considerations and factors listed in Title V:

• Systemic risk regulation with respect to insurance.

• Capital standards and the relationship between capital allocation and liabilities, including standards 

relating to liquidity and duration risk.

• Consumer protection for insurance products and practices, including gaps in State regulation.

• The degree of national uniformity of State insurance regulation.

• The regulation of insurance companies and affiliates on a consolidated basis. 

• International coordination of insurance regulation.

In addition, Title V states that the Report must also examine:12

• The costs and benefits of potential Federal regulation of insurance across various lines of insurance 

(except health insurance). 

• The feasibility of regulating only certain lines of insurance at the Federal level, while leaving other 

lines of insurance to be regulated at the State level.

• The ability of any potential Federal regulation or Federal regulators to eliminate or minimize regulatory arbitrage.

• The impact that developments in the regulation of insurance in foreign jurisdictions might have on 

the potential Federal regulation of insurance.

• The ability of any potential Federal regulation or Federal regulator to provide robust consumer 

protection for policyholders.

• The potential consequences of subjecting companies to a Federal resolution authority, including 

the effects of any Federal resolution authority -

o On the operation of State insurance guaranty fund systems, including the loss of 

guaranty fund coverage if an insurance company is subject to a Federal resolution authority; 

o On policyholder protection, including the loss of the priority status of policyholder claims over other unsecured general creditor claims; 

11 31 U.S.C. § 313(p).

12 31 U.S.C. § 313(p)(3).
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o In the case of life insurance companies, on the loss of the special status of separate account assets and separate account liabilities; and

o On the international competitiveness of insurance companies. 

• Such other factors as the Director determines necessary or appropriate, consistent with the 

principles set forth in the prior paragraph.

FIO received nearly 150 written comments, which are available online at treasury.gov/initiatives/fio. 

In November and December 2011, FIO had an initial round of consultations with nearly 40 different insurance sector participants, ranging from insurance regulators, to insurers, to consumer advocates. On 

December 9, 2011, FIO hosted a conference at the Treasury where participants representing the interests of consumers, insurers and reinsurers, producers, and academics discussed regulatory modernization. Topics included marketplace oversight and licensing, international developments, and prudential 

oversight. FIO’s study and consultations continued throughout 2012 and 2013. This Report reflects 

some of the many issues and topics raised by stakeholders throughout the consultative process, including through written comments, at the Treasury conference, and also through FIO’s direct engagement 

with federal, state, and international supervisors. 

Structure of the Report

This Report is divided into five principal sections. Section I, the introduction, presents the recommendations for modernizing insurance regulation in the United States. This discussion also includes 

a general assessment of whether federal involvement is necessary in the regulation of insurance and, if 

so, what manner that involvement should take. 

Section II describes the history of insurance regulation in the United States, highlighting significant 

events in its development. The historical perspective helps frame the current debates on modernization by illustrating the continuing debate, raised in different contexts and time periods, as to whether 

federal or state insurance regulation would best address the need for improved uniformity and oversight. This section begins by discussing the advent of state insurance regulation in the 19th century, key 

Supreme Court decisions such as Paul v. Virginia (1868) and United States v. South-Eastern Underwriters

(1944), the passage of the McCarran-Ferguson Act in 1945, the reaction of state regulators and Congress to insolvency crises in the 1960s through the early 1990s, and the passage, in 1999, of the GrammLeach-Bliley Act (GLBA). This section also explores state regulators’ reaction to Congressional interest 

in insurance regulation and outlines recent proposals for federal oversight. It concludes by discussing 

the financial crisis, reforms enacted under the Dodd-Frank Act, and the creation of FIO. 

Section III presents the analysis underlying the recommendations regarding prudential oversight 

issues. It reviews the framework by which insurers are evaluated and regulated for solvency as these 

topics are currently being discussed by the U.S. and the international regulatory communities, including the European Union (EU) and the IAIS. More specifically, this section analyzes the approaches 

state regulators use to assess an insurer’s capital adequacy, together with discretionary practices and 

emerging issues on reserving and the regulation of captives. This section also discusses corporate governance matters and group supervision in the context of national and international reforms. Finally, 

this section evaluates current approaches to insurer resolution and guaranty fund processes. 

Section IV presents the analysis supporting the recommendations concerning marketplace oversight, 

focusing on market and consumer issues that have been the subject of the recurring debate on national regulatory uniformity. Some of the principal topics in this area are: (1) multi-state licensing for 

insurance producers; (2) the state-based insurance product approval processes; (3) examinations of an 

insurer’s market conduct; (4) rate regulation; and (5) insurance scoring and risk classification practices for personal lines insurance consumers. This section also reviews the states’ regulatory treatment 
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of insurance lines affected by natural catastrophes, the accessibility of insurance to Native American 

communities, collection of taxes for multi-state surplus lines placements, and suitability standards for 

the sale of annuity products. 

Section V discusses insurance modernization in the context of basic principles of regulatory reform. 

The Report comprehensively addresses all of the statutory considerations and factors, but not in a serial 

or individual manner. 

Recommendations for Modernization of Insurance Regulation in the United States 

For over a century, the debate over reform of insurance regulation in the United States has focused 

largely on the practical and legal limitations of the state-based insurance regulatory system. The 

absence of uniformity in the U.S. insurance regulatory system creates inefficiencies and burdens for 

consumers, insurers, and the international community. For example, per dollar of premium, the costs 

of the state-based insurance regulatory system are approximately 6.8 times greater for an insurer operating in the United States than for an insurer operating in the United Kingdom, and increase costs for 

P/C insurers by $7.2 billion annually and for life insurers by $5.7 billion annually.13 The need for uniformity and the realities of globally active, diversified financial firms compel the conclusion that federal 

involvement of some kind in insurance regulation is necessary. Regulation at the federal level would 

improve uniformity, efficiency, and consistency, and it would address concerns with uniform supervision of insurance firms with national and global activities. 

The increasingly international dimension of the insurance marketplace, in and of itself, is also an 

important consideration. U.S. firms are not the only ones with a global reach. Non-U.S. firms have 

significantly expanded market share around the world, including in the U.S. direct and reinsurance 

markets, a trend that likely will continue because of the size of the U.S. insurance market. Insurance 

regulatory issues will increasingly require international attention and cooperation. The federal government’s predominant role in foreign affairs is one reason for the necessity of a federal presence in 

insurance regulation. It would be much less costly, much less prone to arbitrage, and much easier to 

negotiate internationally for more efficient and effective oversight of the insurance sector if U.S. insurance regulation had greater uniformity and predictability. 

The limitations inherent in a state-based system of insurance regulation, however, do not necessarily 

imply that the ideal solution would be for the federal government to displace state regulation completely. The business of insurance involves offering many products that are tailored for and delivered 

at a local level. For the most part, effective delivery of the product will require local knowledge and 

relationships, and local regulation. Moreover, establishing a new federal agency to regulate all or part 

of the $7.3 trillion insurance sector would be a significant undertaking. The personnel, resources, and 

institutional expertise needed to execute such an endeavor at a professional and rigorous level would, 

of necessity, require an unequivocal commitment from the legislative and executive branches of the 

U.S. government. 

In light of these considerations, this Report concludes that the proper formulation of the debate at 

present is not whether insurance regulation should be state or federal, but whether there are areas in 

which federal involvement in regulation under the state-based system is warranted. Reframed in this 

manner, the basic question with respect to reforming any aspect of insurance should be whether federal involvement is warranted at this time and, if so, in what areas. The necessity for federal involvement 

should depend on assessment of questions such as whether states can take measures to regulate effec13 McKinsey & Company, “Improving Property and Casualty Insurance Regulation In the United States,” 

(April 2009).
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How To Modernize And Improve The System Of Insurance Regulation In The United States

tively and with uniformity, the degree of the national or federal interest, and the nexus of the issues 

and the firms with the global marketplace. 

If the answer to the first inquiry is that federal involvement is warranted, the inquiry then turns to what 

kind of federal involvement would best provide for attaining the policy objectives. Federal involvement 

can take many forms, ranging from direct regulation to standard-setting or operating a program that 

supports or replaces an otherwise failed insurance market. In all events, federal involvement should be 

targeted to areas in which that involvement would solve problems resulting from the legal and practical 

limitations of regulation by states, such as the need for uniformity or the need for a federal voice in 

U.S. interactions with international authorities.

In light of the foregoing, FIO believes that, in the short term, the U.S. system of insurance regulation 

can be modernized and improved by a combination of steps by the states and certain actions by the 

federal government. The recommendations are as follows.

Areas of Near-Term Reform for the States

Capital Adequacy and Safety/Soundness

1) For material solvency oversight decisions of a discretionary nature, states should develop and implement a 

process that obligates the appropriate state regulator to first obtain the consent of regulators from other states in 

which the subject insurer operates.

2) To improve consistency of solvency oversight, states should establish an independent, third-party review mechanism for the National Association of Insurance Commissioners Financial Regulation Standards Accreditation 

Program.

3) States should develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives.

4) State-based solvency oversight and capital adequacy regimes should converge toward best practices and uniform 

standards.

5) States should move forward cautiously with the implementation of principles-based reserving and condition 

it upon: (1) the establishment of consistent, binding guidelines to govern regulatory practices that determine 

whether a domestic insurer complies with accounting and solvency requirements; and (2) attracting and retaining supervisory resources and developing uniform guidelines to monitor supervisory review of principles-based 

reserving.

6) States should develop corporate governance principles that impose character and fitness expectations on directors and officers appropriate to the size and complexity of the insurer.

7) In the absence of direct federal authority over an insurance group holding company, states should continue to 

develop approaches to group supervision and address the shortcomings of solo entity supervision. 

8) State regulators should build toward effective group supervision by continued attention to supervisory colleges. 

Reform of Insurer Resolution Practices 

9) States should: (1) adopt a uniform approach to address the closing out and netting of qualified contracts with 

counterparties; and (2) develop requirements for transparent financial reporting regarding the administration 
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How To Modernize And Improve The System Of Insurance Regulation In The United States

of a receivership estate.

10) States should adopt and implement uniform policyholder recovery rules so that policyholders, irrespective of 

where they reside, receive the same maximum benefits from guaranty funds. 

Marketplace Regulation

11) States should assess whether or in what manner marital status is an appropriate underwriting or rating 

consideration.

12) State-based insurance product approval processes should be improved by securing the participation of every state 

in the Interstate Insurance Product Regulation Commission (IIPRC) and by expanding the products subject to 

approval by the IIPRC. State regulators should pursue the development of nationally standardized forms and 

terms, or an interstate compact, to further streamline and improve the regulation of commercial lines.

13) In order to fairly protect consumers in all parts of the United States, every state should adopt and enforce the 

National Association of Insurance Commissioners Suitability in Annuities Transactions Model Regulation.

14) States should reform market conduct examination and oversight practices and: (1) require state regulators to 

perform market conduct examinations consistent with the National Association of Insurance Commissioners 

Market Regulation Handbook; (2) seek information from other regulators before issuing a request to an insurer; 

(3) develop standards and protocols for contract market conduct examiners; and (4) develop a list of approved 

contract examiners based on objective qualification standards.

15) States should monitor the impact of different rate regulation regimes on various markets in order to identify 

rate-related regulatory practices that best foster competitive markets for personal lines insurance consumers. 

16) States should develop standards for the appropriate use of data for the pricing of personal lines insurance. 

17) States should extend regulatory oversight to vendors that provide insurance score products to insurers.

18) States should identify, adopt, and implement best practices to mitigate losses from natural catastrophes.

Areas for Direct Federal Involvement in Regulation

1) Federal standards and oversight for mortgage insurers should be developed and implemented.

2) To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and the United States 

Trade Representative pursue a covered agreement for reinsurance collateral requirements based on the National 

Association of Insurance Commissioners Credit for Reinsurance Model Law and Regulation. 

3) FIO should engage in supervisory colleges to monitor financial stability and identify issues or gaps in the regulation of large national and internationally active insurers.

4) The National Association of Registered Agents and Brokers Reform Act of 2013 should be adopted and its 

implementation monitored by FIO.

5) FIO will convene and work with federal agencies, state regulators, and other interested parties to develop personal auto insurance policies for U.S. military personnel enforceable across state lines.

6) FIO will work with state regulators to establish pilot programs for rate regulation that seek to maximize the 

number of insurers offering personal lines products.

7) FIO will study and report on the manner in which personal information is used for insurance pricing and 
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How To Modernize And Improve The System Of Insurance Regulation In The United States

coverage purposes.

8) FIO will consult with Tribal leaders to identify alternatives to improve the accessibility and affordability of 

insurance on sovereign Native American and Tribal lands.

9) FIO will continue to monitor state progress on implementation of Subtitle B of Title V of the Dodd-Frank Act, 

which requires states to simplify the collection of surplus lines taxes, and determine whether federal action may 

be warranted in the near term.

Potential Federal Solutions to States’ Failure to Modernize and Improve

As detailed further in this Report, many of the areas for which FIO recommends that there be reform 

of the state regulatory system relate to subject matter areas in which the states already have been working to make changes. For a variety of reasons, however, progress has been uneven despite the absence 

of any dispute about the need for change. As a result, should the states fail to accomplish necessary 

modernization reforms in the near term, Congress should strongly consider direct federal involvement.

The precise manner of federal involvement is a matter for Congress to determine. Recent experience 

suggests that proposals for federal involvement have fallen into two paradigms: (1) the federal government serving as a coordinating body that also adopts national rules and standards that would preempt 

state law, but that would leave direct enforcement of the rules and standards to the states; and (2) 

direct federal regulation of selected areas or aspects of the insurance industry, whether it be oversight 

of one element of the distribution chain (e.g., multi-state producer licensing) or a particular line of 

insurance.

Federal Standards Implemented by the States

The first paradigm is for the federal government to serve as a coordinating and facilitating body to 

assist states with developing national standards and rules. One example of this approach occurred in 

1990, when Congress mandated the development of standard benefit designs for Medicare supplement 

policies. This approach imposed uniform product design on so-called “Medi-gap” policies, thereby 

enabling consumers to comparison shop. Under this approach, Congress permitted the states to develop the product standards promulgated as regulation by the U.S. Department of Health and Human 

Services Center for Medicare and Medicaid Services. 

Another example is the National Association of Registered Agents and Brokers Reform Act of 2013 

(NARAB II), which is presently under consideration by Congress. Under NARAB II, a commission would 

be established and guided by a board comprised of state regulators and producers. The National Association of Registered Agents and Brokers (NARAB) would be responsible for issuing multi-state licenses to 

producers which would preempt the application of any state law or regulation for purposes of licensing 

and continuing education. Standards will be established, in part, by state regulators, and producers will 

benefit from one centralized licensing location and process. 

Other reform proposals have resembled the foregoing examples of federal/state collaboration. Congress explored one such approach in 2004, when two members of Congress offered a discussion draft 

known as the “State Modernization and Regulatory Transparency Act,” or the “SMART Act.” This 

discussion draft put forth a comprehensive insurance reform proposal that would have provided for the 

development of national standards and coordinated regulation. It proposed that uniform standards 

would be enforced at the state level. While the states would develop the uniform standard, each uniformity requirement included an enforcement mechanism to incentivize state participation. For example, 

failure to streamline licensing for producers would result in preemption of the law of the state that 

failed to adopt the uniformity standard. This discussion draft, if introduced and adopted, would have 
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How To Modernize And Improve The System Of Insurance Regulation In The United States

required uniform standards for issues that remain a challenge today: producer licensing, product approval, and surplus lines tax remittance, among others.

One proposed reform has been to adopt a “state passport system.”14 In this scenario, Congress would 

establish a national standard, or would defer rulemaking on an appropriate topic to an administrative 

agency, and failure by the states to implement an appropriate national standard would then result 

in federal preemption. Another version of the national passport approach would authorize FIO, for 

example, to evaluate state regulatory standards and identify best practices or national standards based 

on consensus of the states. If FIO surveys state regulatory practices, whether by mandate or choice, 

FIO could determine whether a satisfactory level of uniformity exists and promulgate that standard as a 

national target.

Another variant of federal standard-setting is the “federal tools” concept, whereby Congress enacts a 

regulatory standard and requires the states to develop, adopt, and implement regulation consistent 

with the standard. A “tools” bill typically requires state action within a limited period of time. In the 

absence of appropriate state action, or action by a defined number of states, then the federal law preempts the law in those states that have failed to act. 

Federal standard-setting schemes can have shortcomings. First, if the legislation delegates a vague 

standard or objective to the states, it is unlikely to improve uniformity and efficiency as intended. 

Second, if the legislation contemplates an opt-in by the states, the probability that all states would optin may be small.

Thus, while bills to establish federal standards appear to promote incremental improvement on targeted areas, such legislation must specify standards, processes, and a deadline in order to minimize 

or eliminate the prospect of variance among the states. This experience points to a more general 

challenge for federal involvement as a standard-setter. Standards themselves may impose a degree of 

uniformity. However, application of those standards is equally important to imposing uniformity and 

consistency. Therefore, if federal involvement is to occur through standard-setting, it should be accompanied by mechanisms designed to enhance uniform implementation of the standards through proper, 

consistent enforcement.

Direct Federal Regulation

One manner of providing for uniform application of rules is to authorize the federal government itself 

to directly enforce federally-developed and adopted standards and rules. A number of proposals would 

have subjected much, if not the entirety, of insurance regulation to direct federal oversight. The underlying concept is that the federal government would act not just as standard-setter or rule-maker, but 

also as regulator and enforcer. Many view this as an essential objective of modernization due to the size 

and globalization of the insurance sector and its importance to the national economy. Others assert 

that the federal government need not regulate the entire insurance business, but only certain aspects 

of it. 

For example, one approach would be to adopt federal regulation for those insurance firms that exceed 

thresholds of size, scale, and complexity, or those that have national or global business operations. 

Another approach, which has been a focus of prior proposals, is an optional federal charter, whereby 

those firms that opt for federal charters would be subject to federal regulation. Federal licensing and 

regulation of insurers, however, could be defined by the terms of eligibility. As proposed in the National Insurance Act of 2007 and the National Insurance Consumer Protection Act of 2009, the optional 

14 The Financial Services Roundtable, Public Comment on How to Modernize and Improve the System of Insurance 

Regulation in the United States, December 15, 2011, available at www.regulations.gov.
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federal charter approach would leave to insurers the choice to adopt a federal charter and, therefore, 

to be regulated by the federal government or by the states.15 Yet another approach would be a combination of the first two, where, in general, firms would have an option to adopt a federal charter, but 

that federal regulation for certain large, globally active firms would be mandatory.

15 See pp. 16-17.
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How To Modernize And Improve The System Of Insurance Regulation In The United States

II. A BRIEF HISTORY OF THE REGULATION OF THE UNITED STATES 

INSURANCE INDUSTRY

Early Era of Insurance Regulation and the Limitation on Federal Authority

States first created corporate insurance companies in the late 18th century by enacting individual statutes or charters specific to each insurer. To supervise the activities of a growing industry, in 1851, New 

Hampshire appointed the first state insurance commissioner. A number of states followed soon thereafter. By 1871, each of the then-36 states had an insurance regulator.

There was evidence early that multistate activity by insurers could create tension with the state-based 

regulatory regimes. An early manifestation was the case of Paul v. Virginia, 75 U.S. 168 (1868). Several 

New York insurers had hired an agent to sell policies in Virginia, but because the insurers refused to deposit the licensing bond required by Virginia law, Virginia denied the agent a license. When the agent 

nevertheless sold policies, he was convicted for violating Virginia law. The New York insurers argued to 

the Supreme Court that the Virginia law was unconstitutional, in part as a violation of the Commerce 

Clause of the Constitution. The Court rejected the argument, and stated that the business of insurance 

was not a transaction of interstate commerce, thus placing insurance beyond the authority of the federal government to regulate. Accordingly, the ruling effectively established the states as regulators of the 

insurance sector.

The Court’s decision did not eliminate multistate activity and, with multistate activity, there was recognition of the need for uniformity of rules in different states. The insurance industry and state regulators began to seek ways to promote coordination between states. In 1871, George W. Miller, New York’s 

superintendent of insurance, invited the insurance commissioners from all 36 states to participate in a 

meeting to discuss insurance regulation. Representatives from 19 states attended the inaugural meeting of the association known today as the National Association of Insurance Commissioners (NAIC). 

The importance of uniformity was expressed at that meeting: 

In a session “remarkable for its harmony,” the commissioners are now “fully prepared to go 

before their various legislative committees with recommendations for a system of insurance law 

which shall be the same in all states—not reciprocal, but identical; not retaliatory, but uniform. 

That repeated consultation and future concert of action will eventuate in the removal of discriminating and oppressive statutes which now disgrace our codes, and that the companies and 

the public will both be largely benefited, we have no manner of doubt.”16

Box 1: The National Association of Insurance Commissioners (NAIC)

The NAIC is a voluntary organization that consists of the chief insurance regulatory officials of the 

50 states, the District of Columbia, America Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, 

and the Northern Mariana Islands. Originally formed in 1871, the NAIC reorganized in 1999 as a 

non-profit corporation under the general corporate laws of the State of Delaware and is a 501(c)

(3) tax exempt organization. 

16 Susan Randall, Insurance Regulation in the United States: Regulatory Federalism and the National Association of 

Insurance Commissioners, Florida State University Law Review Vol. 26, 625 at 632 (citing 1995 NAIC Annual 

Report 1 (1996) (quoting Baltimore Underwriter, June 1871)).


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How To Modernize And Improve The System Of Insurance Regulation In The United States

Congress did not pass Senator Dryden’s proposed bill. Not everyone agreed that a federal solution was 

warranted. During the same period in which Senator Dryden introduced his legislation, for example, 

Louis Brandeis, then practicing law in Boston before becoming a Supreme Court Justice, expressed his 

belief that state regulation was preferable. At the time, he served as counsel to a New England policyholders’ committee that was concerned about the potential bankruptcy of Equitable Life Assurance of 

New York. After undertaking a study of the insurance industry, Brandeis expressed concerns about dishonest and inefficient management, the amount of capital that the large insurers controlled, and the 

inefficiency of state regulation. He nevertheless favored improving state regulation to replacing it with 

federal regulation, characterizing Senator’s Dryden’s proposal as a way to “free the companies from the 

careful scrutiny ... of the States.”21 

The Case of South-Eastern Underwriters, Federal Authority to Regulate Insurance, and the McCarran-Ferguson Act

In 1944, in a reversal of its previous position, the Supreme Court concluded that Congress had the 

power to regulate insurance transactions across state lines.22 In so concluding, it echoed the types of arguments made earlier by President Roosevelt and Senator Dryden, noting that insurance, “has become 

one of the largest and most important branches of commerce,” and, “[p]erhaps no modern commercial enterprise directly affects so many persons in all walks of life as does the insurance business.”23 

The case that occasioned the Supreme Court’s decision can be traced back to the San Francisco earthquake of 1906, which bankrupted many fire insurers. In the wake of these bankruptcies, a number of 

states allowed insurers to set premium rates collaboratively, which allowed insurers to avoid competition 

in pricing premiums. The rationale was that avoiding such competition would prevent a deterioration 

in insurers’ financial condition and, consequently, possible insurer insolvencies. The insurance industry formed panels to collaboratively set rates in states where such rate setting was permitted. 

Missouri did not allow collaborative rate setting. Certain fire insurers, however, were found by the United States to be bribing Missouri state officials to permit them to maintain rates in a manner that effectively amounted to rate setting. The United States filed suit alleging that the bribes and the rate setting 

constituted price fixing by a cartel in violation of the Sherman Antitrust Act. The case was brought 

against the South-Eastern Underwriters Association, the largest rate-setting bureau, and ultimately was 

presented to the Supreme Court in 1944. Cases such as Paul had raised the question whether a state 

had the authority to regulate and to tax specific activities of insurers based in other states. The antitrust claim presented in the South-Eastern Underwriters case, however, raised the question whether the 

Commerce Clause of the Constitution granted Congress the power to regulate insurance transactions 

across state lines. The Court held that insurers were engaged in interstate commerce and concluded 

that, even though Congress had not specifically included a provision in the Sherman Act to apply to 

insurance, Congress had the power to include insurers within the scope of federal law.24 

21 Louis D. Brandeis, Counsel for the Protective Committee of Policy-Holders of the Equitable Life Assurance 

Society, “Life Insurance: The abuses and the remedies,” Address delivered before the Commercial Club of 

Boston, 1905, available at http://www.archive.org. 

22 United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).

23 Id. at 540. The Court noted that the “business is not separated into 48 distinct territorial compartments 

which function in isolation from each other. Interrelationship, interdependence, and integration of activities in all the states in which they operate are practical aspects of the insurance companies’ methods of 

doing business.”

24 Id. at 552-553.
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How To Modernize And Improve The System Of Insurance Regulation In The United States

In 1945, in response to the South-Eastern Underwriters decision, Congress passed the McCarran-Ferguson Act25 to clarify that state laws governing the business of insurance are not invalidated, impaired, or 

superseded by any federal law unless the federal law specifically relates to the business of insurance.26 

In the Act, Congress stated that, “the continued regulation and taxation by the several States of the 

business of insurance is in the public interest, and that silence on the part of Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several states.” 

The Crises of Insurer Insolvencies, Congressional Reaction, and State Regulatory Responses

A wave of insolvencies among auto insurers in the 1960s rekindled the debate over the adequacy of 

state regulation and the inadequate level of uniformity in insurance regulation among the states. In 

the absence of guaranty funds, failure of these auto insurers left policyholders without adequate recourse against the assets of the insolvent insurer. The crisis attracted Congressional attention and, in 

1966, prompted a proposal to create a federal guaranty system for insurers, modeled on federal bank 

deposit insurance.27 A decade later, in 1976, Senator Edward Brooke introduced the Federal Insurance 

Act, which would have authorized the federal government to offer optional federal insurance charters, 

preempting state law, and would also have created a federal guaranty fund.28 In a parallel effort a few 

years earlier, in 1969, state regulators, through the NAIC, developed a model guaranty fund act for 

property and liability insurance and, in 1970, a similar model for life and health insurance. Guaranty 

funds aimed to improve policyholder protection with an industry-funded, ex post claims payment system 

whereby consumers would receive some contractual benefit despite an insurer’s failure. Many states 

adopted versions of this model legislation. 

After another series of insurer insolvencies, this time involving over 50 insurers in the 1980s and 1990s, 

including the largest life insurer in California at the time, Congress began a more extensive investigation into the adequacy of insurer solvency regulation. The House Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations, chaired by Congressman John Dingell, issued 

a report in 1990 entitled Failed Promises: Insurance Company Insolvencies.

29 The report found that, “the 

present system for regulating the solvency of insurers is seriously deficient” due to rapid and unbridled 

expansion, underpricing, inadequate oversight, inadequate loss reserves, poor reinsurance transactions, and fraud.30 In 1992, Chairman Dingell introduced a bill that, if enacted, would have instituted 

federal regulation of insurer solvency.31 In 1994, the same subcommittee issued a second report on 

insurer solvency regimes, entitled Wishful Thinking: A World View of Insurance Solvency Regulation.

32 The 

report stated that, notwithstanding state regulatory efforts to address solvency reform, regulation re25 The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015.

26 Id. at § 1012(b).

27 Sen. Thomas J. Dodd, “High-Risk Automobile Insurance Company Insolvencies,” Congressional Record, vol. 

112, Feb. 17, 1966, pp. 3373-3374. 

28 The Federal Insurance Act (S. 3884, 1976). A modified version of the bill was introduced as S.1710 in the 

95th Congress.

29 U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Oversight and 

Investigations, Failed Promises: Insurance Company Insolvencies, 101st Cong., 2nd Sess., Committee Print 101-P 

(Washington: GPO 1990).

30 Id. at III.

31 The Federal Insurance Solvency Act (H.R. 4900, 1992). The bill provided for a broad federal preemption 

of state insurance regulatory powers.

32 U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Oversight and Investigations, Wishful Thinking: A World View of Insurance Solvency Regulation, 103rd Cong,, 2nd Sess., Committee 

Print 103-R (Washington: GPO, 1994).
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How To Modernize And Improve The System Of Insurance Regulation In The United States

mained insufficient because state regulators lacked adequate national and international authority.33 A 

minority report released by the subcommittee, however, disagreed and stated that it favored “strengthening, not dismantling, the current State regulatory system.”34

In the aftermath of the Failed Promises and Wishful Thinking reports, in the 1990s, state regulators, 

through the NAIC, developed and adopted risk-based capital (RBC) formulae for life, property/casualty and health insurers. At the same time, states developed and adopted a self-accreditation program 

now known as the Financial Standards and Accreditation Program, a peer review process intended to 

improve consistency of financial regulation across the state system. Later, in 2001, after several years 

of development, state regulators codified statutory accounting principles (SAP) in an effort to further 

policyholder protection. 

Recent Proposals for Federal Regulation of Insurance to Promote Uniformity

A number of proposals have been set forth more recently to enact federal legislation to address the inconsistency and absence of uniformity in the state-based system of insurance regulation. An important 

initial effort occurred in 1999, when Congress passed the GLBA.35 Although GLBA allowed banks to 

affiliate with insurers through a federally regulated financial holding company, it preserved the states’ 

authorities to regulate insurance company affiliates. GLBA introduced the possibility of addressing the 

absence of uniformity in one key area of state regulation, however, when it included the requirement 

for the creation of NARAB to implement national insurance agent licensing requirements if a majority 

of the states and territories did not meet a 2002 deadline for reciprocity in producer licensing.36 In 

2002, the state regulators certified that 35 states and territories had satisfied the GLBA requirement, 

enough to constitute a majority and thereby avoiding the creation of NARAB.37 

GLBA was the beginning of a series of efforts over the ensuing decade to bring a federal regulatory 

presence to insurance. Between 2001 and 2006, the House Financial Services Committee held more 

than a dozen hearings at both the subcommittee and full committee levels on insurance matters at 

which witnesses discussed issues such as the increasing globalization of the insurance sector and inefficiencies attendant to the lack of uniformity in the state-based system of regulation. Members of Congress also offered legislative solutions. Congressman Michael Oxley and Congressman Richard Baker, 

for example, released a discussion draft called the State Modernization and Regulatory Transparency 

Act (SMART Act) in 2004, which proposed that states comply with uniform standards for licensing, 

market conduct regulation, reinsurance practices, and receivership rules. It also proposed expediting 

the process of introducing new insurance products to the market and shifting toward a system of market-based rates.38

33 Id.

34 Id., at 128.

35 Pub.L. 106-102, (1999).

36 Id. at § 321.

37 NAIC NARAB (EX) Working Group Report: Certification of States for Producer Licensing Reciprocity, 

Adopted Aug. 8, 2002. In 2008, in 2009, and again in 2011, Members introduced “NARAB II” bills to establish a national producer registry (H.R. 5611 (2008); H.R. 2554 (2009); H.R. 1112 (2011)). If enacted, the 

legislation would create NARAB as a national, nonprofit producer licensing corporation and would prohibit states from imposing any additional licensing requirements on non-resident producers who are NARAB 

members. 

38 State Modernization and Regulatory Transparency Act (Discussion draft authored by Rep. Oxley, Chairman, House Fin. Serv. Comm. and Rep. Baker, Chairman, Capital Markets Subcomm.) (2004) available at 

http://www.aba.com/ABIA/Pages/Issue_RM.aspx.
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How To Modernize And Improve The System Of Insurance Regulation In The United States

Although the SMART Act would have required significant increases in the degree of uniformity, state 

regulators’ authorities would have been preserved. Other proposals, however, have prescribed more 

extensive federal regulatory involvement to promote uniform national insurance regulation. For example, a number of bills have called for the creation of an optional federal charter, such as the National 

Insurance Act of 2007, co-sponsored in the Senate by Senators Tim Johnson and John Sununu, and in 

the House by Representatives Melissa Bean and Edward Royce.39 This proposed legislation would have 

created an optional federal charter for property/casualty and life insurance.40 

The Executive Branch presented a similar proposal in a 2008 report by the Treasury entitled Blueprint 

for a Modernized Financial Regulatory Structure.

41 Noting that the insurance regulatory system suffered 

from duplicative, inconsistent, and non-uniform regulation, the report proposed the creation of an 

optional federal insurance charter as an interim step toward a unified national chartering system. The 

Blueprint also included proposals for federal licensing for insurance producers and the creation of an 

Office of Insurance Oversight at Treasury.42 In April 2009, The National Insurance Consumer Protection Act was introduced in the House by Representatives Bean and Royce with the stated purpose of 

improving uniformity in insurance regulation.43 The bill proposed a single, optional federal charter for 

the insurance industry, including insurers, reinsurers, and insurance producers.44 

In June 2009, the Treasury released Financial Regulatory Reform: A New Foundation that recommended 

the establishment of an Office of National Insurance “to gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector.”45 In this policy statement, 

the Treasury articulated six principles by which to measure proposals for insurance regulatory reform:

1. Effective systemic risk regulation with respect to insurance.

2. Strong capital standards and appropriate match between capital allocation and liabilities for all 

insurance companies.

3. Meaningful and consistent consumer protection for insurance products and practices.

4. Increased national uniformity through either a federal charter or effective action by the states.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated 

basis, including those affiliates outside of the traditional insurance business.

6. Increased international coordination. Improvements to our system of insurance regulation 

should satisfy existing international frameworks, enhance the international competitiveness 

of the American insurance industry, and expand opportunities for the insurance industry to 

export its services. 

39 S. 40 and H.R. 3200.

40 Id. These proposals are sometimes described as “dual charter” proposals.

41 Treasury, Blueprint for a Modernized Financial Regulatory Structure, March, 31, 2008.

42 Id.

43 The National Insurance Consumer Protection Act (H.R. 1880) (April 2, 2009).

44 Id.

45 Treasury, Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation, June 

2009, at 39.




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required before the Secretary may make a determination on whether to seek the appointment of the 

FDIC as receiver of an insurance company. 

Under the FIO Act, FIO’s mission also extends to international matters, where FIO is responsible for 

coordinating federal efforts and developing federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the IAIS. Until the creation 

of FIO, a single federal entity had not been specifically designated to represent the United States in 

discussions about the global insurance regulatory framework and international regulatory standard-setting. FIO’s current efforts on prudential aspects of international insurance matters, primarily coordinated through the IAIS, complement the reforms of the Dodd-Frank Act and include: (1) the identification of global systemically important insurers (G-SIIs) to be subject to heightened supervision and 

regulation; (2) the development of a common framework for the supervision of internationally active 

groups, including a quantitative capital standard; and (3) the integration of resolution measures into 

international standards applicable to insurers operating in multiple countries. 
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How To Modernize And Improve The System Of Insurance Regulation In The United States

III. PRUDENTIAL OVERSIGHT

The Solvency Framework

In the context of insurance, “solvency” generally refers to the ability of the insurer to meet its obligations. Solvency regulation has been and continues to be primarily the responsibility of state regulators. 

It broadly consists of prudential rules (such as capital requirements and accounting standards, together 

with guidelines governing investment portfolios), protocols for regulatory intervention with troubled 

institutions (including insolvency proceedings and requirements for guaranty funds), and supervisory 

practices intended to promote and maintain the safety and soundness of insurers (including financial 

examination and analysis, company licensing, and collaboration with regulators from other states and 

international jurisdictions). Primary financial oversight of any given insurer is performed by the state 

in which the company is domiciled, i.e., typically where it was formed and maintains its corporate license to operate. Other states generally defer to the regulatory authority of the insurer’s domestic state 

with respect to prudential supervision.51 

Before the financial crisis, increasing globalization and complexity of the business of insurance had 

prompted the international regulatory community to reexamine the adequacy of prudential oversight 

of insurers and the consistency of cross-jurisdictional and cross-sectoral regulatory treatment. The 

importance of that review has only been underscored by the financial crisis. Currently, domestic and 

international regulatory discussions around solvency regulation are primarily focused on prudential 

standards, enterprise risk management, and group (i.e., consolidated) supervision. FIO has authorities 

that include monitoring all aspects of the industry and the identification of issues or gaps in regulation 

that could have financial stability consequences, and representing the U.S. government in prudential 

aspects of international insurance matters. The dual developments of the financial crisis and the unprecedented internationalization of the insurance market have led to increased emphasis on all aspects 

of solvency oversight, both at the state and federal levels. In addition, international standard-setting 

activities have grown in importance and focus. 

More specifically, the IAIS is the forum through which insurance supervisors and authorities from more 

than 140 countries, including U.S. state regulators, convene to develop international insurance supervisory standards and best practices. The IAIS does not prescribe a particular approach or structure with 

which a country must satisfy an international standard. 

The Dodd-Frank Act vests FIO with authority to:

coordinate Federal efforts and develop Federal policy on prudential aspects of international 

insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors (or a successor entity) and assisting the Secretary in 

negotiating covered agreements[.]52

FIO currently represents the United States on the IAIS Executive and Financial Stability Committees, 

and is involved with the Macro-Prudential Surveillance Subcommittee, along with other subcommittees. 

FIO’s Director also serves as Chair of the IAIS Technical Committee, which leads the development of 

substantive, technical standards, including the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). 

51 State regulators developed the Financial Regulation Standards Accreditation Program (see p. 29) between 

1988 and 1990 in the midst of a series of large insolvencies and congressional inquiry into those insolvencies that culminated in the Failed Promises report. 

52 31 U.S.C. § 313(c)(1)(E).
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How To Modernize And Improve The System Of Insurance Regulation In The United States

In its role as representative of the United States, FIO consults with state regulators, relevant federal 

agencies, consumers, insurers, and other stakeholders and technical experts. FIO’s current substantive 

priorities in this capacity are: (1) developing and field testing ComFrame so that it serves supervisors’ 

interests and reflects the realities of insurance industry practices; (2) refining a methodology and process to identify G-SIIs; (3) establishing enhanced supervisory measures to be applied to a G-SII, including cross-border resolution practices; and (4) enhancing insurance group supervision in light of recent 

Financial Stability Board (FSB) recommendations. While FIO is not a functional regulator, these international prudential matters fall within the ambit of the authority to develop federal policy on prudential aspects of international insurance matters. In addition, FIO’s authority to monitor all aspects of the 

insurance industry, including its regulation, bring these matters of financial stability and the standards 

applicable to internationally active insurers directly within FIO’s area of focus. 

On October 16, 2013, the IAIS released a third version of a draft consultation paper that outlines ComFrame. ComFrame is designed to establish a comprehensive framework for supervisors to: (1) address 

activities and risks at the insurance group level; (2) develop principles for better global supervisory cooperation; and (3) foster global convergence of regulatory and supervisory measures and approaches. 

The ComFrame concepts, as presently drafted, are likely subject to revision and refinement through 

the results of the important field testing phase, which is in its early stages and will study the impact of 

ComFrame’s qualitative and quantitative requirements. Through the development of common supervisory approaches, implementation of ComFrame should reduce the compliance and reporting burden 

on the increasing number of insurers operating in multiple international jurisdictions, and increase 

the shared confidence of global supervisors. In addition, ComFrame seeks to further understanding 

of group structures through risk analysis and transparency. Improved consistency of supervisory approaches to solvency oversight would promote more effective and efficient supervision of groups, build 

trust among the international supervisory community, and foster markets that allow for the participation of U.S.-based insurers.53 

In 2010, the FSB instructed the IAIS to develop a methodology to identify G-SIIs and the enhanced 

prudential measures to which designated firms would be subjected. The IAIS established the Financial 

Stability Committee (FSC), in which FIO has participated since July 2011 and been actively engaged 

since April 2012. FIO’s FSC priorities have been to work with national and international colleagues 

to ensure the rigor and quality of the IAIS methodology, as well as to align the IAIS process with the 

Council’s three-stage process for determining whether a nonbank financial company should be designated for supervision by the Federal Reserve. 

Insurers, in contrast to banks, are not currently subject to uniform capital requirements at the global 

level. On July 18, 2013, the FSB issued mandates to change that, directing the IAIS to make tangible 

progress in the following areas: 

• As a foundation for Higher Loss Absorbency (HLA) requirements (i.e. higher capital requirements) for G-SIIs, the IAIS will develop a Straightforward Backstop Capital Requirement 

(SBCR) to apply to all group activities, including non-insurance subsidiaries, to be finalized by 

the end of 2014. 

• Building on the SBCR, and following public consultation, the IAIS will, by the end of 2015, 

develop implementation details for HLA requirements. These will apply starting from January 

2019 to those G-SIIs identified in November 2017, using the IAIS methodology. 

• The IAIS will develop, and the FSB will review, a work plan to develop a comprehensive, 

group-wide supervisory and regulatory framework for Internationally Active Insurance Groups 

(IAIGs), including a quantitative capital standard (QCS). The timeline for the finalization of 

the framework will be agreed by the FSB by the end of 2013. 

53 See IAISweb.org for more details.
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On the same day the FSB issued these mandates, it also announced that, in consultation with the IAIS 

and national authorities, it had identified an initial list of G-SIIs. The population of IAIGs—approximately 50-60 firms from around the world—would include all nine G-SIIs.

The IAIS has been considering alternatives for an SBCR. These proposals will be released for a 60-

day public consultation beginning in December 2013. Through 2014, the IAIS will finalize an initial 

version of the SBCR and alternative approaches for the application of HLA requirements to the G-SIIs. 

Even once finalized, the SBCR will be subject to testing and refinement in the years leading to 2019. 

Whether the SBCR serves as a basis for HLA, whether the QCS will build on the SBCR, or whether the 

QCS will serve as the basis for HLA, remain open questions.

The IAIS released a revised draft of the ComFrame concept paper for a 60-day public consultation 

on October 16, 2013. This version of ComFrame includes a capital adequacy assessment process that 

would subject an insurance group to a series of plausible and adverse scenarios. At the same time, 

ComFrame’s QCS will be developed in concept by the end of 2016 and, thereafter, will be tested for two 

years before being finalized in late 2018.

Development of international insurance capital standards remains a daunting and unprecedented 

challenge. Nevertheless, driven by the fast-paced internationalization of insurance markets, IAIS members appear committed to achieving the stated objectives. Of necessity, the SBCR will be simpler and 

less granular than the QCS, although development of both will be guided by the boundaries of time, 

resource and achievability. 

Another significant development in solvency oversight has been the EU’s 2009 adoption of a regulatory 

framework known as Solvency II. Solvency II will soon be adopted by the European Parliament as part 

of an omnibus legislative package, with a scheduled implementation date of 2016. Notably, despite the 

previous delays with adoption in the EU, components of Solvency II have been adopted in other countries, including China and Mexico.

Broadly structured around the three pillars of capital, supervision, and disclosure, Solvency II would require adherence to RBC requirements at both the individual regulated entity and group levels, whether 

pursuant to a standardized formula or based on the insurer’s own internal models subject to supervisory review. (See Box 4). As originally formulated, Solvency II would have been particularly consequential for the U.S. insurance sector because of its requirement for unilateral assessments of insurance 

regulation in other jurisdictions (including the United States) and because it would impose solvency 

requirements on insurers doing business in the EU to the extent the home jurisdiction’s requirements 

are deemed to be unsatisfactory in comparison to Solvency II. Through the EU-U.S. Insurance Project 

(see Box 4), the EU and the United States have committed to a collaborative work plan that will enhance understanding and cooperation and, where appropriate, promote greater consistency between 

the two jurisdictions. Thus, the orientation of the discussion has been altered by virtue of the EU-U.S. 

Insurance Project which will lead, where appropriate, to the increased convergence and compatibility 

of the two insurance regulatory regimes.

Finally, in the United States, in December 2012, state regulators released a Solvency Modernization 

Initiative (SMI) Roadmap, which they describe as a critical self-examination designed to update the 

states’ approach to solvency oversight. Among the areas reviewed are capital requirements, governance 

and risk management, group supervision, statutory accounting and financial reporting, and reinsurance. The SMI Roadmap also reports state regulators completed adoption of the Risk Management 

and Own Risk Solvency Assessment (ORSA) Model Act, which comprises enterprise risk management 

requirements and standards for insurers, together with the ORSA Guidance Manual. The SMI Roadmap 

also notes that state regulators adopted the NAIC Insurance Holding Company System Regulatory Act 



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duration of liabilities. Since insurers typically have less leverage than banks and prefund insurance liabilities by investing premium income, insurers generally are not subject to the kind of liquidity risk that 

banks face. Insurers are subject primarily to underwriting risk and market risk (including both interest 

rate risk and credit risk).

State regulation, which directly regulates only insurance entities, requires insurers to satisfy RBC 

requirements. RBC does not set a capital target for an insurer but, rather, sets a baseline capital level 

such that, in the event an insurer approaches that baseline level, a state regulator may take corrective 

action to conserve or improve the insurer’s financial condition. RBC requirements are grounded in a 

basic risk-based methodology that takes four categories of risk into account. Briefly, these risks are: (1) 

asset risk, which covers market and credit risks on balance sheet assets, including bonds, equities and 

other financial assets, as well as reinsurance receivables and investments in subsidiaries; (2) insurance 

risk, which covers risks related to the underwriting and pricing of policies and contracts, as well as risks 

related to the adequacy of claims reserves; (3) interest rate risk, which covers potential losses due to 

interest rate changes and asset/liability mismatch; and (4) business risk, which covers guaranty fund 

assessments and general business risks, such as litigation. 

NAIC Financial Regulation Standards Accreditation Program

States have sought to establish generally consistent solvency oversight approaches across jurisdictions 

through the NAIC Financial Regulation Standards Accreditation Program (Accreditation Program). 

Following the wave of insurer insolvencies in the 1980s, the Accreditation Program was developed as a 

response to Congressional inquiries into the regulation of insurers. The Accreditation Program evaluates member states for substantial compliance with NAIC-established solvency oversight standards and 

practices. Accreditation standards are minimum standards against which states are assessed on not 

more than a five year cycle. 

To be accredited, a state must have in force laws that are substantially similar to the significant elements 

that have been identified as the key provisions in each of the relevant NAIC model laws or regulations. 

If a state fails to meet the accreditation standards and loses its accreditation, then the work of that state 

regulator in maintaining and enforcing insurer solvency standards for its domestic industry will not receive deference from other states’ regulators. Although several states have been subjected to tentative 

accreditation pending improvement, no state has ever lost its accreditation. All states are now accredited, with the State of New York having been accredited most recently in 2009. 

Notwithstanding the foregoing efforts to establish consistency in capital regulation, significant elements 

of non-uniformity remain. First, for example, even though RBC standards have been adopted by all 

states, those standards are not applied to all insurers. Some states allow certain classes of insurers not 

to comply with RBC requirements. For example, fraternal benefit societies operating as life insurers 

are treated differently for RBC purposes and only 14 states have adopted the applicable model law. 

Second, as another example, monoline insurers (e.g., mortgage insurers and financial guaranty insurers) are not subject to RBC requirements; instead, these entities have been subject to different capital 

ratio requirements that are enforced differently from state-to-state. Up to and through the crisis, state 

regulators granted waivers from adherence to capital ratio requirements in order to allow mortgage 

insurers to continue operating. These developments are particularly noteworthy given the subsequent 

history of insolvency with much of the financial guaranty business and the challenges encountered by 

mortgage insurers, including insolvency. (See Box 5). 

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Third, RBC standards are not necessarily applied uniformly. The lack of uniformity occurs largely 

because of a range of discretionary decisions by state regulators that can affect the reported or actual 

amount of an insurer’s capital. These discretionary decisions can occur in a number of areas, but some 

of the more important decisions that affect solvency oversight involve decisions regarding reinsurance 

captives and permitting deviations from standard accounting practices. Although supervisory discretion may be necessary for some regulatory purposes, a principal concern with extensive and inconsistent use of such discretion is that it may effectively exempt an insurer from abiding by capital requirements, thereby undermining the comparability of the RBC framework across different jurisdictions. 

Such variability has the potential to create safety and soundness concerns. Moreover, such inconsistent 

discretionary decisions create competitive imbalances that disadvantage insurers domiciled in one state 

solely because that regulator’s discretion may be more circumspect than that of the lead state regulator 

of a competitor. 

It is important for accounting and capital standards, and discretionary variances from those standards, 

to be governed by uniform rules. Under the current system of state regulation, consistency can occur 

only by uniform adoption and implementation of such standards and rules. As noted, however, the 

regulatory system has not resulted in consistent implementation of solvency oversight, notwithstanding 

coordination efforts through the NAIC, because regulators have interpreted and enforced even similar 

standards differently. 

Two reforms could assist the coordination efforts and further improve uniformity and consistency. 

First, variations resulting from discretionary practices can be reduced if state regulators develop and 

implement a process whereby before implementing a discretionary practice involving important solvency oversight matters, the domestic state regulator notifies and also obtains the consent of regulators 

from other states in which the subject insurer operates. In the case of insurers operating in multiple 

states, such an approach would require, at a minimum, the concurrence of insurance regulators from 

multiple states prior to permitted deviation from significant solvency standards. For insurance groups 

that are subject to supervisory college oversight, consent of other regulators could be obtained through 

the ongoing activities of the college. 

Second, the credibility and effectiveness of the Accreditation Program could be bolstered if it becomes 

also subject to independent, third party review. Currently, only state regulators, NAIC staff, and NAIC 

contractors are charged with evaluating states’ compliance with the Accreditation Program. States often consult with the NAIC’s legal staff when considering adoption of model laws and regulations, yet it 

is the NAIC’s legal staff that is solely responsible for assessing compliance of states with adoption of the 

key elements of model laws and regulations. To improve the reliability of this peer review structure, an 

additional independent review and audit layer would provide a helpful perspective on the uniform adoption 

and implementation of capital rules and other standards. This independent review will also help to maintain the incentive for accreditation reviews to be conducted with appropriate and objective rigor. 

Mortgage Insurance

Recommendation: Federal standards and oversight for mortgage insurers should be developed and implemented.

Like financial guarantors, private mortgage insurers are monoline companies that experienced devastating losses during the financial crisis. A business predominantly focused on providing credit enhancement to mortgages guaranteed by the government-sponsored enterprises (GSEs), Fannie Mae 

and Freddie Mac, mortgage insurers migrated from the core business of insuring conventional, well-underwritten mortgage loans to providing insurance on pools of Alt-A and subprime mortgages in the 

years leading up to the financial crisis. The dramatic decline in housing prices and the impact of the 

change in underwriting practices required mortgage insurers to draw down capital and reserves to pay 
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claims resulting in the failure of three out of the eight mortgage insurers in the United States. Historically high levels of claim denials, including policy rescissions, helped put taxpayers at risk.

Regulatory oversight of mortgage insurance varies state by state. Though mortgage insurance coverage 

is provided nationally, only 16 states impose specific requirements on private mortgage insurers. Of 

these requirements, two govern the solvency regime and, therefore, are of particular significance: (1) 

a limit on total liability, net of reinsurance, for all policies of 25 times the sum of capital, surplus, and 

contingency reserves, (known as a 25:1 risk-to-capital ratio); and (2) a requirement of annual contributions to a contingency reserve equal to 50 percent of the mortgage insurer’s earned premium. In 

addition to the states, the GSEs (and through conservatorship, the Federal Housing Finance Agency) 

establish uniform standards and eligibility requirements that in some cases are more stringent than 

those required by state regulators. As the financial crisis unfolded, mortgage insurers no longer met 

state or contractual capital requirements. State regulators granted waivers in order to allow mortgage 

insurers to continue to write new business while the GSEs loosened other standards that were applicable to mortgage insurers. 

The private mortgage insurance sector is interconnected with other aspects of the federal housing finance system and, therefore, is an issue of significant national interest. As the United States continues 

to recover from the financial crisis and works to reform aspects of the housing finance system, private 

mortgage insurance may be an important component of any reform package as an alternative way to 

place private capital in front of any government or taxpayer risk. Robust national solvency and business 

practice standards, with uniform implementation, for mortgage insurers would help foster greater confidence in the solvency and performance of housing finance. To achieve this objective, it is necessary 

to establish federal oversight of federally developed standards applicable to mortgage insurance. 

Captives and the Impact on Capital in the Life Insurance Industry

Recommendation: States should develop a uniform and transparent solvency oversight regime for the transfer of 

risk to reinsurance captives. 

Captive insurance programs, in the conventional meaning, typically are entities (usually corporate affiliates set up by a parent company) that provide a self-funded insurance-like product for a single non-insurance business. Captives include a diverse set of entities and are most often established to meet the 

unique needs of the owner. For example, a large manufacturing firm may establish a captive to cover 

property damage to its facilities around the country. 

However, captives also have developed as a tool for insurers to transfer risk within the affiliated insurance group. A reinsurance captive, sometimes referred to as a special purpose vehicle, or SPV, allows 

an insurer to transfer risk to an affiliated entity, thereby reducing reserve obligations and freeing the 

underlying insurer’s capital to be used for other purposes. However, reinsurance captives are not subject to the same solvency oversight as a traditional commercial insurer or reinsurer. Thus, reinsurance 

captive programs can be mechanisms by which insurers decrease capital and reserves at the insurance-entity level through intra-group reinsurance arrangements while also reducing overall regulatory 

scrutiny across the group. 

Over the past 30 years, the use of captives has grown from less than 1,000 captives in 1980 to over 5,000 

operating worldwide today.54 In particular, U.S. commercial life insurers’ use of reinsurance captives 

to transfer insurance risk has grown, perhaps due to reserve requirements for some life insurance and 

annuity products. In the United States, almost 30 states, the District of Columbia and the U.S. Virgin 

54 Marsh, Next Generation Captives – Optimising Opportunities, 2008; A.M. Best Captive Center.
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Islands serve as domiciles for reinsurance captives.55 Indeed, states are aggressively competing to be 

domestic regulators for reinsurance captives.

There are two basic concerns with reinsurance captives that are increasingly prevalent in the life insurance business. The first is that reinsurance captives allow an insurer to receive credit against its reserve 

and capital requirements by transferring risk to the captive even though the captive is not bound by rigorous or consistent capital rules across the states. Reinsurance captives can be established with a small 

percentage of the capital required to establish a commercial insurance license in the same state. In 

particular, the standards that govern the quality of capital that reinsurance captives must hold are not 

sufficiently robust. For example, some state laws currently allow intra-company letters of credit, parental guaranties, or intra-company guaranties to constitute capital for captives. These instruments may 

not be sufficiently loss-absorbing if a significant adverse event were to occur. In many cases, a significant adverse event would cause a captive to fail and spread losses retained within the holding company 

or to another affiliate within the group, thereby accentuating group risk. 

If an insurer is to receive credit against a capital or reserve requirement because of risk transferred to 

an insurance captive, the rules governing the quality and quantum of assets offered in support of the 

captive should be uniform across states and sufficiently robust and transparent in order to prevent arbitrage by insurers. The matter is one that must be assessed within the rubric of the capital adequacy of 

an insurance group as a whole. Under the current state-based capital adequacy regime, group capital 

assessments rely on CRA ratings or on a firm-produced ORSA to evaluate a group’s capital position and 

the strength of intra-group guarantees. Neither of these measures of group capital adequacy, however, 

is a substitute for group capital standards that are established and supervised by regulators. 

Second, there is a lack of transparency for captive oversight from state-to-state. While transparency 

to investors and the public is important, transparency to regulators is particularly critical and absent. 

Unlike the case of traditional insurers for which financial statements are made publicly available on the 

NAIC’s website or the websites of the domestic state and the company itself, the financial statements of 

captives are kept confidential between the captive manager and the domestic state. Due to the limits of 

state regulatory authority, this concern is especially critical when a state regulator must rely on information from another state in which a reinsurance captive is domiciled.

In response to these issues and to the increased use of reinsurance captives, the NAIC commenced 

a review of state approaches to captives in October 2011. The NAIC received comments on a draft 

white paper on regulation of reinsurance captives, released on November 29, 2012, which offered five 

recommendations addressing accounting, confidentiality and reinsurance regulatory matters. The 

NAIC then issued a revision of the white paper on June 6, 2013. While this paper showed the regulator 

dialogue was continuing, it notes the lack of agreement among the states on issues of transparency and 

confidentiality, on whether captives should be assigned a company code and name and included in the 

regulators’ company database, and on how to address inconsistencies between the current approach to 

reinsurance captives and the more general laws governing credit for reinsurance (where the reinsurer 

is a third party company, as opposed to an affiliate within the same group). The comments illustrate 

that several states seek greater regulatory scrutiny and uniformity in captive oversight, while others 

remain committed to the status quo. Still other states are interested in reducing oversight fees and premium taxes for reinsurance captives, possibly to allow jurisdictions to attract more reinsurance captive 

enterprises for economic development purposes. 

On June 12, 2013, the New York Department of Financial Services (NYDFS) issued a report that details 

the initial findings of an investigation into the use of reinsurance captives by life insurance companies 

as a capital arbitrage vehicle. The NYDFS found that New York-based insurers and affiliates alone 

55 Business Insurance, Market Insights, Captive Domiciles 2012.
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accounted for $48 billion of “shadow insurance” capital manipulation. The NYDFS report found that 

existing state-based disclosure regulations are inadequate, inconsistent, and incomplete to properly 

identify and regulate these transactions; and that reserves were diverted and risk-based capital was artificially boosted, misleading regulators, investors, and the general public. The NYDFS report identified 

regulatory inadequacies in transparency with respect to the use of letters of credit, parental guarantees, and 

other forms of capital permitted by state captive regulators but not disclosed or made publicly available.

To modernize and improve state-based oversight of reinsurance captives, states should develop and 

adopt a uniform and robust standard for transparency, not only of the liabilities transferred to a reinsurance captive, but also of the nature of the assets that support a reinsurance captive’s financial status. 

As part of such an oversight regime, states should develop and adopt a uniform capital requirement 

for reinsurance captives, including a prohibition on those types of transactions that do not constitute a 

legitimate transfer of risk, e.g. that do not provide the protections intended by the Credit for Reinsurance Model Law. Subject to limitations on the disclosure of legitimately proprietary information, these 

transactions should be disclosed in the financial statements of the ceding insurer. Finally, states should 

develop and adopt nationally-consistent standards for oversight of the reinsurance captive industry that 

includes public disclosure of the financial statements of such captives, adopting nationally-consistent 

standards for oversight of all captives, and adopt those standards as a feature of the Accreditation Program. 

Issues Surrounding RBC Methodology and Adequacy Determination

Recommendation: State-based solvency oversight and capital adequacy regimes should converge toward best 

practices and uniform standards. 

The RBC framework has been criticized both on the basis that it is too prescriptive and rigid and that 

it is too permissive and fails to adequately capture economic and other risks. For example, one stated 

shortcoming is that RBC applies a single framework to all insurers regardless of size, complexity, and 

risk profile. Other criticisms of the RBC methodology are that it relies on static statutory accounting valuation of assets and liabilities instead of economic valuations, that it uses pre-determined factor-based calculations instead of dynamic risk models, and that the risk weights for certain assets and 

liabilities should be modified (e.g., those for investment assets and reinsurance recoverables56). The 

criticisms also state that the current RBC methodology lacks explicit quantification for key risks, that 

certain risks are currently not captured in RBC at all (such as catastrophe and operational risks, the socalled “missing risks” issue), and that the risks are calibrated in a manner that is not clear or consistent. 

State regulators are reviewing the RBC framework and intend to address certain of the foregoing criticisms of the methodology, including the “missing risks” issue and adjustment of certain risk weights. 

To complement RBC requirements, state regulators have also begun to develop a risk assessment 

regime whereby insurers make annual self-assessments of capital adequacy and report those annual 

determinations to state regulators. The self-assessments, known as ORSA, would include stress testing 

and a requirement to detail risk management systems and policies. If adopted by the states as presently 

contemplated, the self-assessment obligations would apply both to a statutory insurance entity and to a 

consolidated group engaged in the business of insurance. For firms operating in the United States and 

also the EU, consideration should be given to the convergence of EU and state-based ORSA requirements in order to minimize redundant or duplicative reporting requirements for participating insurers. 

As state regulators work to refine the RBC methodology and develop ORSA, two important considerations should be kept in mind. First, programs such as ORSA present the question of whether state regulators possess sufficient resources with the prerequisite technical skills and experience to review the 

56 This refers to the counterparty credit risk associated with a reinsurer paying an insurer for the insurer’s 

incurred losses. 
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complex insurer self-assessments of risk and capital adequacy. If ORSA requires significant investments 

in actuarial modeling expertise and professional services, state regulators may confront significant challenges to meet those needs. If state regulators move to reliance on third-party contractors for an ORSA 

assessment, a uniform national standard should be used to determine qualified contractors, as well as 

a means to assure that state regulators adequately understand, and are accountable for, the work and 

findings of such contracted specialists. 

Second, solvency oversight and capital adequacy principles should be attuned to international developments and should endeavor to integrate best practices, standards and principles that are developed 

through international consensus. As major participants in the business of insurance become increasingly global in operation, it is important for insurance regulatory authorities to guard against capital 

arbitrage across international jurisdictions. 

Reserving

For insurance purposes, reserves are liabilities that are reported on insurers’ balance sheets for the ultimate payment of future losses and policyholder benefits. Reserves are often set using factors and rates 

determined by an insurer’s actuary consistent with guidelines established in state law for insurance 

products. Reserve levels for insurers operating in the United States and offering certain life insurance 

and annuity products have been set according to a state law rules-based formula that, insurers claim, results in excessive reserves that detract from the insurer’s ability to maximize the value of its capital. For 

example, in the life insurance sector, insurers complain that reserve requirements for certain products 

fail to reflect current mortality rates and fail to integrate the insurer’s particular business mix and risk 

profile. 

Principles-Based Reserving

Recommendation: States should move forward cautiously with the implementation of principles-based reserving 

and condition it upon: (1) the establishment of consistent, binding guidelines to govern regulatory practices that 

determine whether a domestic insurer complies with accounting and solvency requirements; and (2) attracting 

and retaining supervisory resources and developing uniform guidelines to monitor supervisory review of principles-based reserving. 

As required by state law or regulation, life insurers currently calculate reserves for life insurance policies based on a standardized formula prescribed by the Model Standard Valuation Law (SVL) of the 

NAIC. Although the SVL’s prescribed valuation mortality table is based on U.S. population data and 

contains a prudent margin for reserving, the reserve calculated is not specifically tailored to the circumstances of any insurer because it does not consider more particular attributes of policyholders in 

individual insurer portfolios. Critics of the current formula-based approach to reserving for life insurance contend that it: (1) is static and too conservative; (2) fails to capture all the particularized risks 

inherent in increasingly complicated life insurance benefits and guaranties; and (3) does not reflect 

life insurers’ business practices, such as the hedging of risk through derivatives use plans. However, reserves are subjected to an annual asset adequacy test analysis to verify the adequacy of reserves through 

different stochastic and deterministic models, with additional reserves established if necessary. Many 

industry participants argue that redundant reserve requirements force reliance upon reinsurance captives in order to reduce excessive reserves and allow life insurers to efficiently use capital. 

For nearly a decade, state regulators have been considering a move to principles-based reserving (PBR) 

to address these concerns. Whereas the formula-based approach to quantifying reserves uses standardized calculations, PBR relies upon an insurer’s internal risk modeling and analysis techniques, including the use of insurer-specific claims experience with specific portfolios of business, to incorporate consideration of particularized risks and thereby to more closely tailor calculations to the actual attributes 
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of insurer portfolios. State regulators adopted a supporting Valuation Manual (Manual) at a December 

2012 NAIC meeting that contains details of the principles-based approach and defines the methods for 

calculating life insurer reserves. However, legislative adoption of the revised SVL by a supermajority of 

states (42) representing at least 75 percent of the nationwide premium volume is needed along with a 

supermajority NAIC adoption of the Manual before the Manual and PBR become operative. 

The difficulty with consistent adoption, interpretation and enforcement of a principles-based approach 

under the current system of insurance legislation and regulation was evident through the Valuation of 

Life Insurance Policies Model Regulation (Regulation XXX), which establishes reserve requirements 

for life insurance products with secondary guarantees, and Actuarial Guideline 38 (AG 38). AG 38 was 

first adopted by the NAIC in 2003 to address questions pertaining to Regulation XXX such as clarifying reserve requirements for new universal life insurance product designs. AG 38 was revised in 2005 

to clarify guidance applicable to sophisticated shadow fund designs and in 2007 to provide an interim solution for reserving for universal life with secondary guarantees with respect to certain matters. 

Notwithstanding these revisions and clarifications, different state regulators had different interpretations regarding the meaning of AG 38, resulting in competing firms holding more (or less) capital in 

reserve, depending on the jurisdiction. This state-by-state variance led to competitive imbalances and 

substantial criticism from industry participants and observers. State regulators have pursued a solution 

whereby reserving for prospective policies is premised on an agreement negotiated between several 

states and the life insurance industry, but the agreement does not address marketplace imbalances that 

result from previously divergent state regulator interpretations. As even this example of a successful 

compromise demonstrates, full consistency among states is difficult to achieve.

The U.S. life insurance sector’s reserving requirements should properly reflect current mortality rates, 

the life insurer’s business model, and its particular risk profile, but substantial concerns arise with the 

prospect of a wholesale adoption of PBR. In addition to consistency issues, state regulators will also 

face the challenge of maintaining a sufficiently high level of expertise for understanding the “black 

box” of the models on which reserve levels would be established. Specifically, the need for many more 

sufficiently trained and expert actuaries and examiners than are currently available to regulators raises 

necessary questions with respect to the states’ ability to verify insurers’ implementation of PBR in a 

uniform manner that is consistent with the Manual. Furthermore, the state-by-state interpretation and 

application of PBR means consistency across the states will be difficult to achieve. To obtain necessary 

expertise, states likely would have to contract with consulting actuaries and other professionals, many 

of whom may have clients in the life insurance industry and, thus, state regulators will need to sort 

through and manage potential conflicts of interest. 

Following the leadership of New York, state regulators in California, Florida and North Dakota, among 

others, established a working group through the NAIC to recognize the challenges of implementing 

PBR but allowing the implementation to move forward. Recently, however, the NYDFS identified flaws 

and raised serious questions about the efficiency of the working group process. Some industry leaders 

oppose the effort as an initiative that could lead to further weakening of the state solvency oversight regime. 

States should move forward with substantial caution to implement PBR. State regulators require significant additional technical expertise or resources to properly evaluate the rigor and quality of idiosyncratic reserve models that vary among firms within a heterogeneous insurance industry. Therefore, 

states should also adopt standards for the oversight of the vendors who will provide related consulting 

services to the states. 
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Credit for Reinsurance 

Recommendation: To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and the 

United States Trade Representative (USTR) pursue a covered agreement for reinsurance collateral requirements 

based on the National Association of Insurance Commissioners Credit for Reinsurance Model Law and Regulation.

Reinsurance is a risk management mechanism whereby insurers transfer, or “cede,” risk to an “assuming” reinsurer. The state-based capital regime for insurers recognizes the value of reinsurance typically 

by permitting the insurer to reduce its reserve liabilities in some proportion to the risk that is ceded to 

a reinsurer. This also can reduce the insurer’s capital requirements as determined by RBC. 

Under the current state regulatory regime, states insurance regulators do not have direct oversight over 

non-U.S. reinsurers, but instead regulate the solvency of those U.S. insurers that purchase reinsurance. 

If a reinsurer is based in the United States, then the ceding carrier receives 100 percent credit on its 

financial statement to the extent that gross liabilities are transferred, or ceded, to that reinsurer. In 

most states, however, if the reinsurer is a non-U.S. firm, and if it is not licensed, accredited, or approved 

by the regulator of the state in which it seeks to provide reinsurance, the reinsurer typically must post 

qualifying collateral equal to 100 percent of the actuarially estimated reinsurance liabilities that it has 

assumed from the ceding insurer in order for the ceding insurer to receive full credit. This is true 

even though non-U.S. reinsurers typically are not required to have a domestic license in order to write 

business in the United States, and regardless of the financial strength of the foreign reinsurer or the 

strength of the supervisory regime in the reinsurer’s home jurisdiction. The issue is particularly significant because non-U.S. reinsurers play a large role in the U.S. market, accounting for at least 58 percent 

of the reinsurance premium volume that is ceded by U.S.-based insurers.57 

This collateral requirement has long been a subject of discussion within the domestic and international 

reinsurance sector. Proponents of collateral requirements often refer to the importance of reinsurance 

recoverables to the U.S. insurance marketplace. Others point to the solvency impact on the primary 

insurer in the absence of adequate collateral if reinsurance fails to deliver according to a contractual 

promise. Critics of the current system, on the other hand, maintain that a determination of whether a 

reinsurer should post collateral should be more sensitive to evolving risk-based considerations. Other 

related questions in this discussion have been the basis and extent to which regulators should recognize 

the capital regimes in reinsurers’ home jurisdictions, the impact of collateral requirements on reinsurance capacity, and the increased costs for insurers and consumers. 

In November 2011, state regulators, working through the NAIC, unanimously adopted amendments to 

the Credit for Reinsurance Model Law and Regulation (Model Collateral Law) that, if enacted at the 

state level, would authorize the state regulator to certify unauthorized reinsurers for reduced collateral regulatory standards. As of July 2013, the NAIC reports that 18 states have adopted some form of 

authorization for the state regulator to accept less than 100 percent collateral from non-U.S. reinsurers, 

but the authorization is not uniform in structure or implementation. Among other requirements of 

the Model Collateral Law, for an unauthorized reinsurer to be certified, the reinsurer must be domiciled and licensed in a jurisdiction deemed to be “qualified.” The determination of whether a non-U.S. 

jurisdiction is qualified would be made by each state regulator, based on the quality of regulation in the 

non-U.S. jurisdiction, among other criteria. If a state regulator concludes that a non-U.S. jurisdiction 

is qualified, the Model Collateral Law, if applied, would then require the state to make a further determination as to the quality of the reinsurer. The state is to assign a “secure level” rating based, at least 

in part, on the opinion of a CRA. This rating would then be used to determine the minimum level of 

collateral required by the reinsurer for the ceding insurer to receive 100 percent credit against capital 

requirements for the reinsurance. 

57 Reinsurance Association of America, Offshore Reinsurance in the U.S. Market – 2011 Data (2012). 
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Recent state regulator action on this topic has been noteworthy and constructive. The Model Collateral Law represents a step forward but it remains incomplete. For example, a determination by one state 

within the United States of the adequacy or the equivalence of regulation by another nation would 

not bind other states. One consequence might be that a foreign jurisdiction could link insurance 

determinations by a state to other economic or regulatory issues pending between the United States 

and the affected foreign jurisdiction, possibly frustrating broader U.S. economic or regulatory policy.58 

The Model Collateral Law also has other features that require further deliberation. For example, it 

depends too heavily upon assessments of reinsurers’ creditworthiness by CRAs. It would be preferable 

for other, more risk-based empirical factors to be the basis upon which to determine creditworthiness. 

Sound credit risk management practices by ceding insurers, and not reliance on CRAs or regulatory 

measures, should be the basis on which collateral relief is provided. 

Under Title V of the Dodd-Frank Act, FIO and the United States Trade Representative (USTR) are 

authorized, jointly, to negotiate and enter into “covered agreements.” Specifically, such “covered 

agreements” would relate to the recognition of prudential measures with respect to the business of 

insurance or reinsurance that achieve a level of protection for insurance or reinsurance consumers 

that is substantially equivalent to the level of protection achieved under State insurance or reinsurance 

regulation. Such agreements may be necessary to impose uniformity on a prudential insurance matter 

of national interest.59 As part of such an analysis, FIO would consider pending prudential regulatory 

issues affecting the United States and relevant foreign jurisdictions. 

FIO is authorized to coordinate federal efforts and develop federal policy on prudential aspects of 

international insurance matters. In formulating federal policy, FIO is well-positioned to make determinations regarding whether a foreign jurisdiction has sufficiently effective regulation and, in doing 

so, would consider other economic or regulatory issues pending in the United States and between the 

United States and affected foreign jurisdictions. 

State regulators have worked constructively to move forward with enactment and implementation of 

the Model Collateral Law. Given the likelihood that the Model Collateral Law would be of non-uniform application, together with the complicating effect of state-by-state inconsistency on economic 

matters of national interest, the circumstances warrant the pursuit of covered agreements for reinsurance collateral requirements. Indeed, the Model Collateral Law could form the basis for such covered 

agreements. To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and 

USTR pursue a covered agreement for reinsurance collateral requirements based on the NAIC Credit 

for Reinsurance Model Law and Regulation.

Corporate Governance – Director and Officer Suitability and Fitness

Recommendation: States should develop corporate governance principles that impose character and fitness expectations on directors and officers appropriate to the size and complexity of the insurer. 

Corporate governance is a broad and expanding area of supervisory interest, particularly for those 

firms based or operating in the United States that also have international operations. Accordingly, 

state regulators do have a practice of checking the fitness of insurer management and directors, as they 

consider the background of officers in determining whether that person is suitable to act as an insurance executive or key owner. When an insurer is initially formed, for purposes of issuing a license to 

operate, state regulators evaluate the character and fitness of prospective owners, directors or officers 

by evaluating the individual’s biographical information. In some instances, this review is limited to 

determining whether the individual has a history of criminal wrongdoing. After an insurance entity is 

58 See AIA v. Garamendi, 539 U.S. 982, 124 S. Ct. 35 (2003).

59 “Covered agreement” is defined at 31 U.S.C. §314 (See footnote 10). 
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operating, state regulators review changes on the board of directors and officers with oversight that is 

often limited to an evaluation of whether the individual self-reports a prior conviction for criminal behavior. State regulators allow an individual to serve in an insurer’s leadership position upon receiving 

notice, but may later revoke that tacit approval if the individual is proven to be unqualified or a threat 

to policyholders.

Even though state regulators conduct fitness reviews, there is an absence of state law or regulation applicable to corporate governance specific to insurers. In 2012, the NAIC compiled a summary of existing 

corporate governance requirements for U.S.-based insurers. With regard to insurance regulation, the 

NAIC summary described various governance-related aspects of prudential oversight requirements for: 

(1) an insurer’s financial reporting and audit functions; (2) the monitoring of an insurer off- and on-site 

and through examinations and ongoing analysis; (3) solvency oversight; (4) regulatory authority over 

transactions; (5) authority of regulators to take corrective action in respect of a troubled insurer; (6) 

the authority of state regulators to operate a receivership; and (7) other processes such as authority over 

market conduct examinations and rate regulation. The summary also described non-insurance related 

governance standards, including from the Securities Act of 1933 and the Sarbanes-Oxley Act of 2002. 

The absence of an NAIC Model law or regulation governing insurer corporate governance has also 

been noted by international authorities. The International Monetary Fund (IMF) conducts a Financial 

Sector Assessment Program (FSAP) to help countries identify and remedy weaknesses in their financial 

sector structures, thereby enhancing resilience to macroeconomic shocks and cross-border contagion. 

FSAP assessments are designed to assess the stability of the financial system as a whole and not that of 

individual institutions. For the insurance sector, supervisory practices are measured against the IAIS 

Insurance Core Principles. In 2009-2010, the IMF conducted an FSAP of the United States financial 

system, including state regulatory oversight of the insurance sector. In its review, the IMF concluded 

there are “no NAIC model laws or regulations that address corporate governance directly.” 

Notwithstanding the absence of authoritative rules and guidelines, insurers have increasingly focused 

on governance and risk management matters since the financial crisis. In recent years, for example, 

many insurers have elevated the prominence of a chief risk officer within the corporate hierarchy. In 

addition to increased focus by insurers, regulatory authorities and standard-setting bodies have been 

engaged in sustained work on corporate governance issues.

The focus on corporate governance should continue and become more defined. Many U.S.-based 

insurers are expanding rapidly in geography, size and complexity, thereby imposing even greater demands on leadership. For example, internationally active insurers are increasingly engaged in sophisticated enterprise risk management practices to measure and understand risks posed to the enterprise 

from any angle or perspective. With standards appropriately scaled to the size and complexity of the 

firm, state regulators should adopt director and officer qualification standards that require individuals 

serving in those roles to have the expertise to assess strategies for growth and risks to the enterprise. 

For an insurer that exceeds size and complexity thresholds, state regulators should adopt an approach 

designed to ensure that individuals nominated to serve in the firm’s leadership ranks have sufficient 

capacity to understand and challenge an insurer’s enterprise risk management. 

Group Supervision

Recommendation: (1) In the absence of direct federal authority over an insurance group holding company, states 

should continue to develop approaches to group supervision and address the shortcomings of solo entity supervision; (2) state regulators should build toward effective group supervision by continued attention to supervisory 

colleges; and (3) FIO should engage in supervisory colleges to monitor financial stability and identify issues or 

gaps in the regulation of large national and internationally active insurers. 
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State regulators are authorized to supervise insurers at the individual entity level, but lack the legal 

authority to supervise a non-insurance affiliate or any affiliate domiciled and operating outside of the 

state. These inherent limitations of state law constrain any particular state regulator from conducting 

oversight over or obtaining information regarding the operations of a multi-jurisdictional insurance 

group such as a large, complex global insurance firm. 

The absence of state regulatory authority over non-mutual holding companies (i.e., solo entity supervision) and the existence of only indirect authority over non-insurance entities within an insurance 

group raise concerns with respect to regulatory acceptance of U.S. insurance firms that desire to 

engage in the business of insurance outside of the United States. International supervisors from other 

developed and emerging economies – markets in which U.S.-based firms are seeking to expand – continue to evaluate the relative strengths and weaknesses of solo entity supervision, particularly with 

respect to solvency matters. To date, actions taken against U.S.-based firms to remedy shortcomings of 

state-based solo entity supervision have been few, but that may change in the coming years. For example, non-U.S. supervisors may determine that solo entity supervision is inadequate for large, complex 

financial firms, especially when those firms have significant market share; if so, then the foreign supervisors may take unilateral remedial action against those firms. 

Experience with recent insurer insolvencies, moreover, illustrates that a comprehensive understanding 

of an insurance group could have resulted in a safer and more stable system. Since 2000, the largest 

U.S. insurer insolvencies were attributable to a variety of causes, but the important facts in common 

among these cases indicate that a group regulator armed with comprehensive supervision of the enterprise may have prevented those failures or resulted in earlier action that could have stemmed the losses. One firm failed due to mismanagement and fraud, including the shifting of assets between affiliates 

and the holding company that could more easily have been detected absent the diffusion of state regulatory responsibility. Another firm failed due to inadequate rate-setting which, if subjected to appropriate enterprise risk management oversight, could have exposed deficient pricing, inadequate reserves 

and the inadequacy of support by the holding company for its licensed entities. A consolidated group 

supervisor with knowledge of an insurer’s enterprise risk management and intra-company transactions, 

together with the appropriate authority, could have been in a position to improve the supervision of 

the failed firms to help assure the safety and soundness of those firms. 

The limits on state regulatory authority hamper effective regulation at a time when insurers are increasingly part of internationally active, diversified financial conglomerates that engage in a variety of 

non-insurance businesses. The inability of this regulatory structure to account for consolidated supervision was evident during the financial crisis, particularly in the case of AIG. The Dodd-Frank Act partly 

addresses this shortcoming of the state regulatory system by introducing provisions on consolidated supervision of the financial activities of nonbank financial companies supervised by the Federal Reserve, 

as determined by the Council. However, the insurance regulatory system itself should be reformed to 

provide for group supervision.

State regulators have taken steps to improve solo entity supervision and to make such entities less 

vulnerable to the weaknesses of affiliates or the group. For example, the regulations of many states 

require prior approval of certain investment and reinsurance transactions between insurers and non-insurer affiliates, and generally require prior approval by the state regulator before capital can be removed from an insurer. 

State regulators may also have the indirect authority to seek information concerning a non-insurer 

parent or affiliate. Specifically, through the NAIC, state regulators adopted a revised Model Insurance 

Holding Company System Regulatory Act and Regulation in 2010 (Holding Company Model Act), 

which grants the state regulators only indirect authority over non-insurance affiliates and the holding 
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company. However, given that direct state regulatory authority is limited to the state-licensed legal entity, there are substantial questions as to how effective the Model Insurance Holding Company System 

Regulatory Act and Regulation can be and whether the law’s indirect authority actually grants insurance regulators effective authority over non-insurance affiliates or holding companies. The NAIC has 

reported that the revised Holding Company Model Act has been adopted in 14 states and is pending in 

15 others. The actual statutory language and implementation has varied among those states in which 

the Holding Company Model Act has been adopted. 

In addition to the Holding Company Model Act, state regulators, working through the NAIC, are evaluating enhancement of group supervision as part of the SMI process. The principal proposal in SMI 

adopts a “windows and walls” approach that would “provid[e] a window into group operations, while 

building upon, rather than rejecting, the existing walls which provide solvency protection,” to insurers. 

The proposal identifies the following “regulatory windows”: (1) the coordination of state participation 

on a national level for sharing information with international regulators; (2) supervisory colleges for internationally active groups; and (3) access to information about unregulated entities within the holding 

company system. 

The NAIC is considering additional guidance in its Financial Analysis Handbook to address group-wide 

supervision. The proposed changes cover topics such as the scope of group supervision, coordination 

and cooperation with supervisors in other jurisdictions, holding company and group-wide financial 

analysis, a financial examination assessment, roles and responsibilities of the group-wide supervisor/

lead state, corporate governance, enterprise risk management, and the supervisory college. 

The state of group supervision in the United States has drawn international attention. In its 2010 FSAP, 

for example, the IMF stated with respect to insurance group supervision: “The U.S. approach is focused 

on securing the financial soundness of individual insurance companies. While this has not been unusual among insurance regulators internationally, many have been supplementing their strong solo company focus with financial and other requirements and more supervisory focus applied at the group level 

and U.S. supervisors should do the same. They do not currently make an assessment of the financial 

condition of the whole group of which a licensed insurance company is a member.”60

In the absence of direct federal regulation of insurance groups, supervisory colleges will be an important means of addressing the conduct of group supervision in the intermediate term. The IMF similarly 

recommended that the United States further develop group supervision and establish international 

supervisory colleges to supervise U.S.-based insurance groups with international operations. 

A supervisory college should be a forum that includes all of an insurance group’s functional regulators, 

both domestic and international, to meet and to share information relating to the supervised group, 

and identify trends or areas of strength or weakness within the group. A supervisory college should 

also establish a system in support of group supervision and offer a formal mechanism for increasing 

regulatory communication and collaboration. For example, the IAIS ComFrame project will significantly improve the operation, efficiency, and substantive value of supervisory colleges for both supervisors and insurance groups. States have undertaken good faith efforts to establish and operate supervisory colleges, and many are in the nascent stages of development. 

Supervisory colleges established for U.S. firms operating nationally and internationally, and for nonU.S. firms with large operations in the United States, should also include FIO in light of FIO’s statutory 

mission to monitor all aspects of the insurance industry, including issues or gaps in regulation, and 

FIO’s significant role with respect to financial stability. The financial stability perspective brought by 

60 IMF, United States: Publication of Financial Sector Assessment Program Documentation — Detailed Assessment of 

Observance of IAIS Insurance Core Principles (2010).
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FIO would be important for the functioning of the supervisory colleges and, similarly, the information 

made available to FIO through activity in the supervisory college would be highly significant to FIO’s 

explicit statutory role as financial stability monitor for the insurance industry. 

Supervisory colleges are necessary but not sufficient, and do not completely substitute for a consolidated regulator. For example, members of a supervisory college may find it difficult to reach consensus on 

important issues and the processes by which the college decides or acts may prove to be inefficient. Given concerns about the adequacy of solo entity supervision for larger groups, particularly for U.S.- based 

firms operating globally, consolidated supervision for large, internationally-active U.S.-based insurance 

firms will require continued focus and national attention.

Resolution of Insolvent Insurers 

The resolution of insolvent insurance entities is governed by state receivership law, specifically the law 

of the insurance entity’s state of domicile. Recent developments stemming from the financial crisis, 

however, have prompted re-evaluation of the extant resolution regime for insurance entities. While 

there already have been reforms with respect to the resolution of large, internationally active insurers, 

further reforms of the resolution regime should be considered.

Resolution of Large, Internationally Active Firms

Establishing an authority that would implement an orderly resolution of a failed financial firm is an essential component of the Dodd-Frank Act. In the case of insurance firms, the Dodd-Frank Act provides 

that orderly resolution under Title II will take place under prevailing state law. In addition, before the 

Secretary may make a determination on whether to seek the appointment of the FDIC as receiver of an 

insurer under Title II, the Secretary must first receive a written recommendation from the FIO Director 

and the vote of two-thirds of the Governors of the Federal Reserve then serving. 

Although resolution of a licensed insurance entity largely occurs under state law, a number of factors 

suggest that it would be important for resolution planning for complex, global insurance firms to 

involve analysis and preparedness extending beyond the framework of state-based receiverships and 

guaranty funds. Consideration of resolution plans for complex U.S.-based national and international insurance firms indicate, for example, that: (1) non-insurance subsidiaries, affiliates and holding 

companies do not participate in guaranty funds or state-based receiverships; (2) insurance entities may 

sell products excluded in whole or in part from guaranty fund protection; and (3) insurance entities 

are not always included in the guaranty fund scheme. These realities mean that, in some cases, a 

significant part of the activities of an insurance group will fall outside of the states’ resolution scheme 

for insurers. In these cases, separate, holistic orderly resolution plans should be developed for globally 

active insurers. 

Resolution of insurers is a focus of the international regulatory agenda. In that regard, in 2013, the 

FSB stated that it will focus on three main objectives: (1) addressing the remaining obstacles to implementation of resolution strategies such as cross-border cooperation and information sharing among supervisors; (2) launching an effective assessment process to evaluate the resolvability of all global systemically important financial institutions, including G-SIIs; and (3) developing guidance for the resolution 

of insurance and other nonbank financial institutions.61 With respect to insurance in particular, the 

FSB will initiate a thematic peer review on resolution regimes. This will include a cross-jurisdictional 

review of the adequacy and effectiveness of resolution regimes for nonbank institutions, including 

insurers, particularly if the failure of those firms could raise financial stability concerns. The FSB is 

61 Financial Stability Board, Press Release, Meeting of the Financial Stability Board in Zurich on 28 January 

(2013). 
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working with the IAIS to develop further guidance on the features and powers necessary for resolution 

regimes to meet FSB standards. 

Receivership

Recommendation: States should: (1) adopt a uniform approach to address the closing out and netting of qualified contracts with counterparties; and (2) develop requirements for transparent financial reporting regarding 

the administration of a receivership estate. 

Insurer resolution proceedings typically begin with the filing of a petition by a state attorney general, 

acting on the recommendation of the regulator of the insurer’s domicile. If the petition is granted, 

the state regulator will be appointed receiver. Once the insurer is in receivership, the state regulator 

generally has three options: conservation; rehabilitation; or liquidation. In a conservation, the state 

regulator attempts to preserve the status quo while additional information is gathered to determine 

whether a more assertive approach in receivership (i.e., rehabilitation or liquidation) is needed. In a 

court-supervised rehabilitation, the state regulator submits to the court a plan to restore the insurer to 

a solvent capital position. If a feasible rehabilitation plan cannot be developed, or is proposed but not 

approved by the court, or if the plan proves unsuccessful, a state regulator will then seek a court order 

allowing for liquidation that will lead to distribution of any insurer assets to policyholders and claimants 

in accordance with state law. 

The determination as to whether and, if so, when to place an insurer into conservation, rehabilitation, 

or liquidation is subject to the discretion of the domestic state regulator. State political, consumer, and 

economic development issues may impact the timing of state regulator action. Furthermore, permitted 

accounting practices can subvert the intent of other solvency tools, such as RBC. The NAIC created the 

Financial Analysis Working Group (FAWG) to provide a forum of peers to engage with domestic state 

supervisors of a troubled insurer. FAWG is often cited by the NAIC as an effective means to help states 

consider appropriate courses of action. Nonetheless, any course of action is entirely dependent upon 

the authority, discretion, and will of the domestic state regulator. 

Following the solvency crisis in the 1960s, states adopted resolution laws and receivership protocols 

in certain important areas. For example, state laws generally protect policyholders and claimants in 

a receivership proceeding by elevating those claims to priority over other creditors. Policyholder and 

claimant protection sometimes takes the form of ring-fencing some assets of an insurer’s receivership estate and prohibiting the use of those funds to pay other estate liabilities. An example of such 

ring-fencing, which has widespread adoption among the states, is protecting owners of variable annuities backed by “separate accounts,” which hold assets that are largely segregated from the insurer’s 

general assets and liabilities.

Beyond issues surrounding policyholder and claimant protection, however, insurer resolution laws vary 

both in specific terms and in application across different states. There have been efforts to impose 

greater uniformity on state receivership laws. In 1978, state regulators developed the first model law on 

insurer resolution. To date, however, only 32 states have adopted this template in whole or in part. In 

2005, the NAIC published the Insurer Receivership Model Act but, to date, only two states have enacted 

legislation based on this model law. 

One important area in which there are state-by-state differences is the treatment of derivatives and 

other qualified financial contracts (QFCs) once an insurer is in receivership. The federal bankruptcy 

code provides protections to counterparties on QFCs by exempting these transactions from the automatic stay and allowing counterparties to terminate and close out QFCs on a net basis. While the 
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Federal Deposit Insurance Act (FDI Act)62 and foreign bankruptcy laws also provide similar protections 

to QFC counterparties, only some state resolution laws do. The lack of inclusion of uniform close-out 

netting and other protections for QFCs in state insurance receivership laws has potential negative consequences for insurers and for the financial system. For example, an insurer operating in a state with 

resolution laws that do not include QFC protections may find it difficult and far more costly to participate in derivatives markets. In addition, the absence of these QFC protections in many state laws could 

have negative implications for financial stability since these provisions are designed in part to reduce 

interconnectedness between firms. Accordingly, states should adopt a uniform approach to address the 

closing out and netting of QFCs with counterparties. 

The status and cost of a receivership estate are issues in which policyholders and other creditors have 

a keen interest, but too often there is a lack of sufficient, clear, and timely information. In 2008, the 

NAIC announced the release of its Global Receivership Information Database (GRID) which serves as a 

publicly accessible repository of information about open and closed estates being administered by state 

insurance regulators (or their designees) as receiver. GRID includes administrative elements such as 

contact information for the receiver, court order references, lines of business that had been written by 

state, and distributions. The database also provides an opportunity for the receiver to post a financial 

statement for the estate. The NAIC reported as of March 31, 2013 that there are wide variances among 

the states as to the extent of information that has actually been made available through GRID, with the 

data submitted by many states as being less than 25 percent complete. Furthermore, the nature, form, 

extent, and timeliness of financial information about insolvent insurers and pertinent disclosures by 

receivers are inconsistent, if available at all. Receivers use various bases of accounting (e.g., cash basis, 

modified cash basis), with widely varying degrees of detail as to disclosures accompanying the financial 

statements. States should develop requirements for transparent financial reporting by receivers about 

the insolvent estate as well as the costs of administration that have been incurred, require timely preparation and filing of reports on a regular basis, and make pertinent aspects of this information publicly 

available. 

Guaranty Funds

Recommendation: States should adopt and implement uniform policyholder recovery rules so that policyholders, 

irrespective of where they reside, receive the same maximum benefits from guaranty funds. 

One condition for operating an insurer in a state is the insurer’s participation in the state guaranty 

fund. State guaranty funds provide for the timely honoring of policyholder claims asserted against an 

insolvent insurer. 

Guaranty funds are administered by state guaranty associations, which are created by state law typically as nonprofit entities and are subject to the oversight and direction of insurers licensed in the state. 

Most states have established separate funds for different lines of insurance, e.g., separate funds for P/C 

and for L/H coverage.63 Guaranty associations dedicated to each line of business participate in national associations – the National Conference of Insurance Guaranty Funds (NCIGF) and the National 

Organization of Life & Health Insurance Guaranty Associations (NOLHGA). 

62 Both the FDI Act and the Orderly Liquidation Authority in Title II of the Dodd-Frank Act provide for a 

temporary 24-hour automatic stay. 

63 Not all insurance lines are covered by guaranty funds, including financial guaranty, mortgage insurance, 

and title insurance. Some states also exempt health maintenance organizations (HMOs) requiring solvent 

HMOs operating in the state to assume the policies and enrollees of the insolvent HMO. Additionally, some 

insurance companies offer non-insurance, non-annuity products such as guaranteed investment contracts 

(GICs) which are also not covered by guaranty funds.
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In the event of an insurer’s insolvency, guaranty associations may take a range of steps to offer continuing protection to policyholders. For example, in the typical insolvency of a P/C insurer, state guaranty 

associations step in to pay the portion of claims within the limits guaranteed by the respective state 

association. In a L/H insolvency, state guaranty associations may arrange continuing insurance coverage for the failed insurer’s policyholders; that can involve entering into “assumption reinsurance” 

agreements with healthy insurers, whereby the healthy insurer assumes policy liabilities in return for a 

transfer of the failed insurer’s assets. NOLHGA may often assist the various state L/H guaranty associations in the negotiation process and in the transfer of liabilities arising from multi-state L/H insurer 

insolvencies to a solvent carrier. Guaranty associations may also assume liabilities until such liabilities 

run off, although this path is less frequently taken. 

NCIGF reported that, through 2011, its member guaranty funds have paid more than $26.4 billion to 

claimants since 1976. NOLHGA states that its members have protected consumers in roughly 75 multistate insolvency cases involving life and health insurers. NOHLGA reports that a significant life insurer 

has not failed since the early 1990s.64 However, despite significant apparent capacity in the guaranty 

fund system, it is unclear how the system would fare in the event of a failure of a large insurance group 

in the United States. Furthermore, an event that would cause such a scenario would likely impact other 

insurers as well. Just as insurers perform stress tests under adverse scenarios, NCIGF and NOLGHA 

should periodically model the potential adverse impacts of such scenarios on the guaranty fund system 

for review by FIO. 

While guaranty funds address many of the consumer protection deficiencies that were experienced 

during the solvency crises that occurred in the 1960s, 1980s, and 1990s, some important consumer 

protection considerations remain. For example, laws concerning product pay-outs by guaranty funds 

to policyholders are not uniform across states. For claims against P/C insurers, maximum payouts 

per claim are generally set by statute between $100,000 and $500,000, with most state laws imposing a 

$300,000 cap. For claims against life and health insurers, guaranty funds provide at least $100,000 in 

coverage for health claims, $300,000 for life claims, $100,000 for cash surrender/withdrawal values, and 

$100,000 for annuity claims. Although these figures define the general range of protection, there are 

significant variations among states on these figures. For example, an annuitant in New Jersey is eligible 

for up to $500,000 of guaranty fund protection, but an annuitant in Indiana with the same product is 

eligible for up to $100,000 in guaranty fund protection. Consumers who purchase the same coverage 

or product from the same company may receive a different guaranty fund benefit if they reside in different states at the time the insurer is placed into receivership. 

States should enact uniform policyholder recovery rules so that all policyholders, irrespective of where 

they reside, receive the same benefits from guaranty funds. In the event that states fail to achieve 

uniformity with respect to guaranty fund benefits, then federal involvement may be necessary to ensure 

fair treatment of all policyholders. 

64 However, see Box 3: Assistance to the Insurance Industry during the Financial Crisis. 
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IV. MARKETPLACE OVERSIGHT, CONSUMER PROTECTION AND ACCESS 

TO INSURANCE

“Marketplace oversight” refers to those aspects of insurance regulation that concern consumer protection, insurance access, and affordability. Marketplace regulation displays substantial state-by-state variance. This variance was the subject of substantial attention in the decade before the financial crisis and 

prompted a number of members of Congress to introduce legislation to introduce greater uniformity. 

Insurers and consumer advocates have criticized this lack of uniformity and the absence of coordination on regulatory matters on grounds of duplication, inefficiency, delay, and uneven consumer protections. 

This section reviews the areas that are most frequently the subject of discussion in the area of marketplace regulation: producer licensing; approval of insurance products for sale; market conduct examinations; and collection of tax for multi-state surplus lines. This section also addresses issues of affordability and access to insurance, including rate regulation, risk classification, natural catastrophes, and 

accessibility of insurance for Native Americans. 

Producer Licensing 

Recommendation: The National Association of Registered Agents and Brokers Reform Act of 2013 should be 

adopted and its implementation monitored by FIO.

A “producer” is an agent or broker who markets, distributes or sells an insurance product to a consumer. Today, even though an increasing percentage of consumers purchase insurance on-line or through 

other direct means, insurance products reach the consumer principally through producers. The 

number of total licensed producers reflects their importance: in 2012, NIPR, an electronic, centralized 

producer database, reported that nearly 2.3 million individuals maintained more than 6 million state 

insurance producer licenses. 

Producers may not market, distribute or sell insurance in a given state without a license from that state. 

States have an application process that typically requires providing personal information, completing 

required education and training, satisfying a background check, and passing a licensing examination. 

Regulating producers is an important activity for states. Producers often are the principal insurance 

point of contact for consumers and, therefore, regulating producers’ qualifications directly bears on 

consumer protection. Producer licensing also generates revenue for the states and state insurance 

departments.

Although approximately 70 percent of producers maintain a license in only one state, the remaining 

are licensed in two or more states. The differences in licensing requirements among the states can 

present duplicative obligations and barriers to entering business in a particular state. 

There have been steps to promote greater uniformity in licensing practices and requirements. In 1996, 

the NAIC, with support from the producer community, developed NIPR, which thereafter established 

the electronic database through which states may obtain and share information about any current or 

prospective licensee. NIPR now offers a range of services to aid with licensing, including single and 

multi-state licenses, single and multi-state renewals, and continuing education verification. 

A few years later, in 1999, Congress, in enacting GLBA, set a deadline of November 2002 to require that 

a majority of the states and territories enact uniform producer licensure laws or adopt reciprocity laws. 

Under GLBA, failure of the states and territories to meet the producer licensing target would have trig-
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gered formation of NARAB, an entity to provide multi-state producer licenses. In response to GLBA, 

however, state regulators developed the Producer Licensing Model Act (PLMA), which sought to create 

a framework for reciprocal recognition of producers seeking to be licensed in more than one state. In 

2002, the NAIC certified that 38 states and territories adhered to the PLMA, thereby complying with 

GLBA and avoiding creation of NARAB. As of 2009, the NAIC certified that 47 states and territories were 

in compliance with the PLMA. After the PLMA, state regulators adopted Uniform Licensing Standards, 

which provide substantive standards for licensing, renewals, and continuing education requirements. 

Notwithstanding these efforts, the inconsistencies and inefficiencies resulting from the absence of 

uniformity in state producer licensing persist. One fundamental reason is the lack of full participation 

by the states in the reciprocity and uniformity efforts. For example, many states do not offer the full 

range of services that NIPR makes available. Moreover, NIPR offers services to help with insurer appointments, or with resident licensing and renewal, but these services are not used by many states. In 

addition, although the NAIC certified that 47 states and territories had adopted PLMA, three that had 

not were New York, Florida, and California, which are among the largest of the state insurance markets. 

Consumers are detrimentally affected by the absence of uniformity and reciprocity in producer licensing. For example, in an increasingly mobile society, many consumers who move across state lines may 

prefer to maintain a relationship with a producer based in another state. The National Association of 

Insurance and Financial Advisors reported, however, that 80 percent of its surveyed members were unable to serve a client who moved to another state, and 12 percent of its members were unable to serve 

50 or more clients who had moved to a state in which the producer was unlicensed.

The lack of uniformity creates duplicative administrative and regulatory burdens with no corresponding consumer benefit. Small firms (or “agencies”) seeking producer licenses in multiple states confront significant resource demands. The Independent Insurance Agents and Brokers of America 

report that more than 1.6 million producers are licensed in more than one state, requiring time and 

expense to obtain licenses that could otherwise be used to develop and grow the producer’s business 

portfolio. The resource burden is also felt at large firms. The Council of Insurance Agents and Brokers described one large firm that holds 76,100 licenses nationally for approximately 5,000 licensed 

individuals, 3,100 of whom are licensed in more than one state. Other firms face similar burdens. 

Even adherence to the PLMA does not necessarily result in the needed uniformity. For those states 

that have adopted the PLMA, reciprocity has not necessarily followed. A business entity that employs 

individuals who sell, solicit, or negotiate insurance is considered a producer under the PLMA. The reality remains, however, that every state requires these business entities to be licensed producers, which 

is in addition to the requirement that every individual producer employed by the entity be individually 

licensed. Some states impose different requirements for the licensing of business entities, including 

entity appointment requirements, licensing for branch locations, affiliation requirements, and filing of 

organizational documents. Regardless of the reasons for these differences, each increases the compliance burden without commensurate benefits of consumer protection.

The lack of uniformity persisting in this area, even following explicit Congressional direction through 

GLBA, warrants Congressional action to establish uniformity and to reduce the burdens of multi-state 

producer licensing. NARAB II, which has passed the House and is pending in the Senate, would establish NARAB, a corporation solely intended to establish uniformity and efficiency in producer licensing 

requirements. 

Producers licensed through NARAB would be able to conduct business in multiple states, but would 

not be subject to licensing requirements in every state in which they do business. Rather, they would 


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products. In 2012, 167 companies registered to file products for approval and submitted 744 filings, 

resulting in the approval of 625 products. The average approval time for the products was 23 days. 

Notwithstanding the strides represented by the formation and function of the IIPRC, for several reasons uniformity and efficiency have yet to be achieved in the area of product approval for life insurance, annuities, long-term care, and disability products. First, state participation in IIPRC is incomplete, largely because California, Florida, and New York have not joined, and the populations of those 

states constitute a substantial portion of the U.S. insurance market. Second, the scope of product lines 

eligible for IIPRC review is limited, and the IIPRC has yet to develop approval standards for group 

annuity, group long-term care or group disability products. Finally, IIPRC permits an insurer to submit 

an approval request directly to a state IIPRC member, thereby allowing an insurer to circumvent IIPRC 

standards completely. Accordingly, insurers have the ability to avoid the IIPRC consumer protection 

standards if those standards are more stringent than the consumer protection standards of the state 

IIPRC member, thus making IIPRC a regulatory tool susceptible to arbitrage. 

Given the shortcomings, dissatisfaction among life insurers persists. In 2011, ACLI’s survey of its members found that 83 percent believe that improvement of policy/contract form approval processes is of 

“critical/major importance.” Life insurers assert that the lack of uniformity in a rapidly evolving and 

growing market for retirement products stifles product innovation. 

States should take the following measures in the short term. First, non-participating states should 

join the IIPRC. For states with a constitutional or legal impediment to joining a multi-state compact, 

state regulators should adopt the IIPRC product standards and processes as model law and regulation. 

Second, such standards should serve as a baseline so as to allow states with higher consumer protection 

standards to continue enforcing those higher standards. Third, to remove opportunities for arbitrage, 

state regulators from member states should prohibit insurers from opting into less restrictive 

non-IIPRC standards. Finally, IIPRC should expand the scope of its product coverage and develop standards for all products within its authority. 

In 1998, state regulators established SERFF to standardize initial product filings with the regulators 

and to expedite submitting insurance policy forms for approval. With SERFF, insurers can simultaneously file for product approval in multiple states but the legal and regulatory standards for form review 

remain different state by state. 

Regulatory approval of policies sold to sophisticated commercial policyholders, though presently subject to less regulatory scrutiny than policies for individuals and families, often impose substantial delay 

and may have the unintended consequence of driving more commercial policyholders to less regulated 

surplus lines coverage or self-insurance. In a 1998 NAIC white paper entitled White Paper on Regulatory 

Re-engineering of Commercial Lines Insurance: Streamlining of Commercial Lines Insurance Regulation, state 

regulators recommended, among other things, a flexible regulatory stance for form and rate review in 

markets found to be competitive by the state regulator, exemptions for large commercial policyholders 

from form and rate review, and authority for state regulators to waive specific policy requirements for 

policyholders primarily located in another state. In the 15 years since that white paper the states have 

made important strides. 

Nonetheless, commercial lines insurance regulation must continue to modernize. Inconsistent and 

sometimes lengthy product approval periods continue to limit the ability of insurers to meet the needs 

of national businesses with new products. Although most states permit exemptions for large commercial policyholders from rate or form review, the premium volume or number of employees that qualify 

an insured as a large commercial policyholder vary by state. Additionally, while the creation of SERFF 


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Market conduct regulation has been the focus of significant criticism by industry and third-party commentators. The principal reasons are that state regulators often fail to adequately coordinate market 

conduct examinations, resulting in multiple examinations for the same or similar sets of issues, with all 

the attendant burdens and inefficiency. A 2003 Government Accountability Office (GAO) report72 noted that states not only differed in the rigor and breadth of market conduct examinations – thus raising 

concerns also about effective consumer protection – but that coordination between states was inconsistent and infrequent. 

In response to these shortcomings, state regulators have taken steps to create a more systematic, structured and uniform market conduct regulation program. Although a Market Conduct Surveillance 

Model Law, adopted by state regulators at the NAIC in 2004, has not been widely adopted, the NAIC 

Market Regulation Handbook (Handbook), has been adopted by most jurisdictions, and describes the key 

components and standards for: (1) market analysis; (2) investigations; and (3) market conduct examinations. Aside from adopting common examination protocols, state regulators collaborate and coordinate market conduct regulation through the NAIC Market Actions Working Group (MAWG). This 

forum permits states to share information gained through market analysis, investigations, or market 

conduct examinations. Based on this information, a state regulator may proceed with a multi-state market conduct examination.73

Notwithstanding these improvements, when the GAO revisited the market conduct examination process in 2009, it determined that states had improved the process, but that differences among the states 

still limited progress toward appropriate coordination and standardization of examinations. The GAO 

acknowledged that states had developed some market conduct guidance, data collection, and analysis 

tools, but noted that substantial variances continued among the states in terms of process, criteria, and 

coordination. Indeed, as of 2011, 45 of 56 NAIC jurisdictions required insurers to submit a Market 

Conduct Annual Statement (MCAS), a compilation of insurer-specific market conduct-related data. 

However, a 2011 ACLI survey of its members noted continued dissatisfaction with market conduct regulation. The ACLI survey noted that 63 percent of respondents rated current market conduct practices 

as “unsatisfactory/needs improvement,” with 78 percent citing a lack of uniformity as the major cause 

of dissatisfaction, along with “speed/timing,” “cost,” and “expertise/capacity.”

State regulators have continued to work on improvements to market conduct regulation and conducted a self-survey to understand current state activities.74 A 2012 NAIC survey demonstrates the continued variation in market conduct regulation among the states: one state carried out 66 percent of all 

interrogatories conducted in 2010, three states carried out 48 percent of all specialized data calls, and 

one state accounted for 73 percent of all reviews of insurers’ self-audits. The survey asked whether 

states would be willing to forgo an examination of an insurer if another state had conducted an examination and ensured all of the issues of concern were corrected. Respondents noted this would depend 

on the comparability of the state’s market conduct examination system, whether the insurer was a 

domestic insurer, the severity of the issues, and the similarity of state laws.

Coordination between states and standardization of market analysis, investigations and examinations 

are essential to modernization. Aside from promoting efficiency and consistency, improved coordination could present an opportunity for state regulators to pool already scarce resources. Moreover, 

72 Insurance Regulation, Preliminary Views on States’ Oversight of Insurers’ Market Behavior, May 6, 2003. 

73 The NAIC developed a number of tools states may use to share information and coordinate market conduct regulation activity. In addition to Market Conduct Annual Statement, these include the Market Initiative Tracking System, the Special Activities Database, the Complaints Database System, the Examination 

Tracking System, Market Analysis Review System, and Regulatory Information Retrieval System.

74 See NAIC Market Regulation and Consumer Affairs Committee Market Regulation Survey August 3, 2012.
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standardization provides consistent and uniform consumer protection for all policyholders irrespective 

of where the policyholder resides. 

Under the state-based regulatory system, states should develop a requirement that market conduct 

regulation be performed according to the Handbook, which would significantly improve the consistency 

of consumer protection across all states. Moreover, as part of the examination protocol, states should 

develop a process whereby information relevant to the same or similar statutory and regulatory requirements first be sought from another regulator before issuing a duplicative request to the insurer. States 

should adhere to a “lead state” concept for multi-state market conduct examinations in order to eliminate unnecessary and duplicative examinations. 

Another factor that may augment the variability of rigor and professionalism from one state to another 

is the increasing dependence of state regulators on contract examiners to perform market conduct 

examinations. States should develop explicit standards and protocols to govern contract examiners 

including cost and schedule, education, professional background, training requirements, and appropriate ethical standards regarding conflict of interest, confidentiality, privacy and report drafting. State 

regulators should also develop a list of approved contract examiners based on an objective evaluation 

of expertise and training to examine specific issues or industry participants. 

Rate Regulation

Recommendation: States should monitor the impact of different rate regulation regimes on various markets in 

order to identify rate-related regulatory practices that best foster competitive markets for personal lines insurance 

consumers. FIO will work with state regulators to establish pilot programs for rate regulation that seek to maximize the number of insurers offering such products.

An insurance rate determines the price at which an insurance policy or contract is sold. Insurers use 

rates to determine the premium due on a particular insurance policy: premium equals the rate multiplied by the number of units of insurance purchased. The rate typically reflects the risk characteristics 

of the purchaser of insurance.

Rate regulation originated in the late 19th century, when insurers gathered in “bureaus” to set rates because of the concern that price competition would bring the threat of insolvency (“destructive competition”). Rate regulation also evolved to allow insurers to exercise greater discretion when setting rates. 

Whereas states formerly set a “mandatory rate,” regulation now is generally based on a legal standard, 

shared by all states, that the rate not be “inadequate, excessive, or unfairly discriminatory.” Today, rate 

regulation principally addresses affordability.

The evolving views on the manner of setting rates is reflected in the variety of processes through which 

states now permit insurers to file rates with the state regulator. (See Box 9). However, many empirical 

studies suggest rate regulation, particularly in auto and homeowner insurance, may adversely impact 

market supply resulting in higher prices and an increase in the market share of the residual market.75 

75 See Lauren Regan, Sharon Tennyson, and Mary Weiss The Relationship Between Auto Insurance Rate Regulation 

and Insured Loss Costs: An Empirical Analysis, NAIC 2009; Mary Weiss, Sharon Tennyson, and Laureen Regan 

The Effect of Regulated Premium Subsidies on Insurance Costs: An Empirical Analysis of Automobile Insurance, The 

Journal of Risk and Insurance, Vol. 77, No. 3, 2010; Richard Derrig and Sharon Tennyson The Impact of 

Rate Regulation on Claims: Evidence from Massachusetts Automobile Insurance, Risk Management and Insurance 

Review, 2011, Vol. 14, No. 2, 173-199; and Sharon Tennyson, The Long-Term Effects of Rate Regulatory Reforms 

in Automobile Insurance Markets, Insurance Research Council, March 2012.

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In making a determination regarding whether or how to implement a pilot program a number of 

factors may be considered. In order to define the factors state regulators may use to make such a 

determination, it is important to understand the characteristics of a competitive market that provide 

sufficient market discipline to maximize the number of insurers offering products to consumers. FIO 

has authority to monitor the affordability and accessibility of non-health insurance products to traditionally underserved communities. In the exercise of this authority, FIO will continue to monitor 

developments in the area of rate regulation and work with state regulators to identify best practices for 

implementation of pilot programs, as well as best practices for monitoring the impact of any change on 

consumer access to insurance. 

Risk Classification

Recommendation: (1) States should develop standards for the appropriate use of data for the pricing of personal 

lines insurance; (2) states should extend regulatory oversight to vendors that provide insurance score products 

to insurers; (3) FIO will study and report on the manner in which personal information is used for insurance 

pricing and coverage purposes.

In determining the insurance rate applicable to particular customers, together with eligibility for coverage and class of service, insurers increasingly consider a myriad of data points to determine an individual consumer’s risk profile. In the context of personal lines insurance products, this practice is familiarly 

known as “risk classification.” Many P/C insurers generally rely upon these methodologies, for example, to place a customer in a particular rating tier, which can carry particularized coverage limits and 

premium prices 

The increasingly prevalent methodology for determining risk profiles for P/C personal lines is to 

rely on insurance scores. Insurance scores are typically generated by algorithms that consider a large 

number of data points, including an applicant’s driving history, age, gender, zip code, marital status 

and credit score, or the components of a credit score. Some estimates indicate that, to one degree or 

another, the vast majority of auto insurers factor in credit scores, or components of a credit score, when 

determining applicable policy rates. The impact of applying these scores can be substantial. For example, some studies suggest that a driver with a poor credit score may pay 40 percent more in premiums. 

Proponents of insurance scores argue that the more data an insurer can collect about an applicant, the 

more accurately the insurer can evaluate risks and price the policy. They also assert that the accurate 

pricing enabled by an insurance score reduces the cost shift in an insurance pool in which consumers 

with a lower risk profile subsidize the costs of individuals with a higher risk profile. These arguments 

are made with particular reference to individuals with high risk habits or jobs, or individuals who live 

in high risk communities. Proponents also contend that insurance scores actually increase insurance 

availability in high risk areas because, in the absence of the ability to price accurately, insurers would 

elect not to offer insurance in those areas at all. 

Insurance scores, however, are controversial. Certain insurance score components, like a credit score, 

have a greater impact on the price quoted for certain consumers. For example, insurers may price personal line policies higher if the policyholder is unmarried, which raises concerns about whether certain 

life events, such as divorce or death of a spouse, or, as in the case of gay and lesbian couples, the legal 

inability to marry in many states, should be considered an appropriate basis for increasing the price of 

mandatory insurance policies. In addition, rating factors like education, occupation, and credit score, 

or the components of a credit score, may be correlated with race and thus it may appear that a greater 

percentage of racial minorities pay higher prices.

Personal auto insurance provides an example of how concerns regarding risk classification processes 

and methodologies can play out. Critics of insurance scoring practices have maintained that risk deter-


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in the home state. The NRRA also expresses the intention of Congress that states adopt nationwide 

uniform requirements, forms, and procedures to provide for the reporting, payment, collection, and 

allocation of premium taxes for nonadmitted insurance. 

As of December 31, 2012, five states and Puerto Rico were participating in the Nonadmitted Insurance 

Multi-State Agreement (NIMA), which created a central clearinghouse for reporting, collecting, and 

allocating nonadmitted insurance premium taxes. No other states are operating in a tax allocation 

agreement. Nine states have entered into the Surplus Lines Insurance Multistate Compliance Compact (SLIMPACT), which would also create a tax payment clearinghouse and an allocation agreement. 

However, SLIMPACT will not become effective until ten states enter into the compact. Many other 

states simply enacted legislation authorizing the collection and retention of 100 percent of the nonadmitted insurance premium taxes for which the state is the home state of the insured. 

Seven states (three of which entered SLIMPACT and four of which have entered no premium tax allocation agreement) are collecting nonadmitted insurance premium taxes at a pro-rata rate according to 

the locations of the multi-state risks. Nonetheless, these states are retaining 100 percent of the premium taxes. Finally, some states are taxing 100 percent of nonadmitted insurance premiums, including 

premiums for risks located in non-U.S. jurisdictions. Some question the legality of such a practice and 

suggest that it subjects insureds to double taxation. 

The NRRA could be a model for insurance regulatory reform because it preserves state regulation but 

provides incentives for states to act in a manner consistent with federal guidelines. It urges states to 

simplify and make uniform the regulation of surplus lines insurance in the United States. However, the 

states have not fulfilled this vision as some states have agreed to share the premium tax collected from 

surplus lines insurance and others have opted to retain the premium tax applicable to the insurer’s 

home state. A compact seems no more likely than before the NRRA became law. Implementation of 

the NRRA demonstrates the challenge of facilitating coordinated state action when coordinated action 

may materially impact state general revenue funds. FIO will continue to monitor state progress on this 

issue. Further federal action on this issue may be warranted in the near term.

Natural Catastrophes76

Recommendation: States should identify, adopt, and implement best practices to mitigate losses from natural 

catastrophes.77

Natural catastrophes can cause severe stress on all aspects of an affected community or region. These 

events strain P/C insurance markets. With an estimated $58 billion in insured losses in the U.S. resulting from weather events, 2012 surpassed the average insured losses of $27 billion from 2000 to 2011.78 

Large-scale natural catastrophes insured through the private sector strain industry resources, often 

resulting in higher premium rates for consumers. After significant outlays resulting from a natural 

catastrophe, insurers typically rebuild capital levels through increases in premiums, which often result 

in higher prices for consumers. 

76 Pursuant to the Biggert-Waters Flood Insurance Reform Act, Pub.L.112-141; 126 Stat. 916 (2012), FIO will 

submit a report to Congress on a variety of insurance-related natural catastrophe topics.

77 This section does not address terrorism risk or the Terrorism Risk Insurance Act (TRIA), as renewed and 

set to terminate on December 31, 2014. The President’s Working Group on Financial Markets is studying 

and will issue a report on TRIA. 

78 Munich Re, 2012 Natural Catastrophe Year in Review, January 3, 2013, available at http://www.munichreamerica.com/webinars/2013_01_natcatreview/natcat_webinar_record/player.html2012. 
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Higher premiums following a catastrophe can limit the affordability and accessibility of conventional 

insurance to consumers. When insurers raised premiums and curtailed dramatically offers of coverage 

following Hurricane Andrew in 1992 and after the Northridge earthquake in 1994, states created publicly supported or operated insurance or reinsurance programs to improve accessibility and affordability of property insurance coverage.

In a 2010 report, the GAO reviewed a sample of these public catastrophe programs, many of which 

have been growing over the last half of the decade.79 From 2005-2010, the state insurance program in 

Mississippi had grown 495 percent, Texas had grown 147 percent, and Florida had grown 146 percent. 

The GAO found that some state catastrophe programs rely upon risk transfer through the reinsurance 

markets, while others rely on post-event funding, bonding, and assessments, to pay for incurred losses. 

States also approach and design these residual market programs with different objectives. Some state 

programs encourage broad participation while other state programs attempt to manage participation 

through eligibility requirements, rates, or through other legislative or market-oriented approaches. 

Most states do not charge actuarially justified rates to residents seeking to participate in a state residual 

market program. In particular, the GAO found:

Six of the 10 programs charged rates that did not fully reflect the risk of loss, potentially discouraging private market involvement and mitigation efforts by property owners. However, 

charging rates that do not fully reflect the risk of loss can also potentially increase broad-based 

participation in state programs. Officials from 7 of the 10 programs said that they took steps to 

encourage private market participation, and officials from 9 programs told us that they are implementing or considering ways to encourage mitigation, including providing mitigation credits 

or attempting to develop a more effective mitigation plan. Officials from most of the programs 

said they encourage broad participation in their programs; however, a few said they specifically 

discourage it and instead try to encourage homeowners to purchase insurance from the private 

market.80

The results of state involvement can be mixed and, accordingly, state approaches are evolving. The California Earthquake Authority (Authority) requires insurers writing homeowner policies either to offer 

earthquake coverage or to join and participate in the Authority. The Authority is privately funded and 

generally manages its exposure through the purchase of private reinsurance. While earthquake insurance is now available to California property owners, the premium cost appears prohibitive for most. 

Only approximately 14 percent of California property owners have earthquake insurance, penetration 

rates roughly the same as before the Northridge earthquake. 

Industry critics assert that public insurance programs in some areas exposed to hurricanes may limit 

or crowd out private market capital. Nevertheless, states with coastal areas exposed to hurricanes have 

found that public support can improve the accessibility of homeowner insurance. Public sector programs frequently inject public capital into an insurance market at rates with which the private sector 

cannot compete. 

The NFIP provides protection for property owners against losses caused by flooding. Superstorm Sandy illustrates the important role of the NFIP in supplementing coverage available for property owners 

through the private insurance market. Until 2005 and the devastating losses of Katrina, Rita, and 

Wilma, premiums collected by the NFIP effectively covered annual losses. Due to the hurricane losses 

of 2005, though, the NFIP accumulated a deficit in excess of $18 billion. When Superstorm Sandy hit 

79 GAO, Natural Catastrophe Insurance Coverage Remains a Challenge for State Programs, GAO-10-568R Natural 

Catastrophe Insurance Coverage (2010).

80 Id. p. 3.
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the northeast in October 2012, NFIP owed the U.S. Treasury $17.8 billion. Due to losses from Sandy, 

Congress passed legislation increasing the borrowing authority of the NFIP to $30.4 billion. 

The Biggert-Waters Flood Insurance Reform Act of 2012 modifies important provisions of the NFIP. 

First, premiums paid for NFIP coverage will more closely approximate rates justified by the risk of loss 

(i.e. more actuarially justified). Second, NFIP, for the first time, is authorized to secure reinsurance 

from the private market at rates and on terms determined to be reasonable and appropriate.81

At this time, different states are engaged in a variety of approaches that are sufficiently new and varied 

such that best practices for national adoption should wait until further development and identification of the more successful of these programs. While public policy debates are focused on the relative 

merits of residual market insurance programs, enhanced property owner mitigation initiatives receive 

widespread support. The amount of insured loss for a particular natural catastrophe is a function of 

the density of exposed properties in an area, and the ability of those properties to withstand the effects 

of the disaster. Effective mitigation strongly enhances the safety of occupants and the durability of 

property. 

Empirical data supports the adoption of statewide building codes to save lives and to reduce the cost 

of property damage. A study by the Louisiana State University Hurricane Center estimated that stronger building codes would have reduced wind damage from Hurricane Katrina by 80 percent, saving as 

much as $8 billion. A more recent report, sponsored by the Federal Alliance for Safe Homes, a nonprofit organization focusing on economic resiliency and the role of mitigation in reducing the economic impact of natural disaster, used the uncommonly large number of natural disasters occurring in 2011 

to highlight the important role that mitigation and planning have played as different areas recovered 

from natural disasters.82

While difficult to implement mitigation measures for every building in a catastrophe prone area, states 

and communities investing in the science of mitigation and exploring ways to reduce losses through 

construction standards may offer the best opportunity for ensuring access to affordable insurance. 

Proper construction techniques and materials can save lives and reduce both insured losses and taxpayer burden. 

States should identify, adopt, and implement best practices for construction standards, including 

building codes, to mitigate losses from natural catastrophes. FIO intends to expound at greater length 

on issues involved with natural catastrophes in the forthcoming report required by the Biggert-Waters 

National Flood Insurance Reform Act of 2012.

81 42 U.S.C. § 4055(a)(2).

82 “Impact 2011: Examining a Year of Catastrophes through the Lens of Resiliency,” December 2011, prepared 

by Weather Predict Consulting, Inc. for the Federal Alliance for Safe Homes 2011 Annual Meeting, www.

flash.org.
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V. TAKING ACCOUNT OF REGULATORY REFORM

In June 2009, Treasury published the white paper entitled Financial Regulatory Reform: A New Foundation, which articulated six principles by which to measure proposals for insurance regulatory reform:83

1. Effective systemic risk regulation with respect to insurance.

2. Strong capital standards and an appropriate match between capital allocation and liabilities for 

all insurance companies.

3. Meaningful and consistent consumer protection for insurance products and practices.

4. Increased national uniformity through either a federal charter or effective action by the states.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated 

basis, including those affiliates outside of the traditional insurance business.

6. Increased international coordination. Improvements to our system of insurance regulation 

should satisfy existing international frameworks, enhance the international competitiveness 

of the American insurance industry, and expand opportunities for the insurance industry to 

export its services.

The Dodd-Frank Act addresses some of these principles directly. For example, the Dodd-Frank Act provides a mechanism for consolidated supervision of insurance firms, or firms with insurance subsidiaries, 

by empowering the Council to determine that a nonbank financial company shall be supervised by the 

Federal Reserve if, at least in part, the firm’s material financial distress could pose a threat to the financial stability of the United States. If the Council determines that supervision by the Federal Reserve is 

appropriate, then the firm shall also be subject to enhanced prudential standards. Designation of such 

firms allows for consolidated supervision of insurers, including corporate affiliates. Similarly, with respect to increased international coordination, Congress empowered FIO to represent the United States 

on prudential aspects of international insurance matters.

While not all of the six principles are directly addressed by the Dodd-Frank Act, as described more 

fully in this Report, those topics are the subject of current reform initiatives at both the national and 

international level. For example, supervisors worldwide are reviewing capital and consolidated supervision regimes independently and multilaterally, including the NAIC and the IAIS. Countries including 

Mexico, Canada, and China are implementing modernized insurance supervisory regimes. Consumer 

protection and market regulation also remains the subject of state, national and international attention. A summary of reform efforts with respect to each of the six principles is discussed below. 

Systemic Risk Regulation. Title I of the Dodd-Frank Act establishes the Council and charges it with identifying risks to the financial stability of the United States, promoting market discipline, and responding 

to emerging threats to the stability of the United States financial system. Under Title I, the Council 

may determine that a nonbank financial company, including an insurer, shall be supervised by the 

Federal Reserve and shall be subject to prudential standards if the Council concludes that company’s 

material financial distress or activities could pose a threat to the financial stability of the United States. 

This supervision, together with heightened prudential standards, will better allow regulators to address 

and mitigate risks to the financial stability of the United States posed by nonbank financial companies. 

83 Treasury, Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation, June 

2009, at 39.
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The Council has three members who specifically have background in or who are involved with oversight of the insurance sector. These members are: (1) a voting member with insurance expertise, who 

is appointed by the President, with the advice and consent of the Senate; (2) the FIO Director, who is 

a non-voting member; and (3) a state insurance commissioner, also a non-voting member. This representation provides the Council with significant regulatory experience and knowledge of the insurance 

industry.

Insurance sector participants and observers argue that traditional insurance business activities do not 

present the kind of risk that could, in the event of failure, impair the functioning of the U.S. financial 

markets. This argument seeks to distinguish insurers from traditional financial intermediaries on the 

ground that insurers by and large do not rely on short-term funding and are not susceptible to runs or 

liquidity stresses because insurers do not hold liabilities, such as deposits. Ordinarily, a withdrawal from 

an insurer presupposes the occurrence of an event covered in a policy (e.g., an accident or death). 

These events are typically uncorrelated (except in the event of mass catastrophes or disasters). 

Financial stability concerns arise more often when traditional insurers engage in non-traditional activities, such as derivatives trading, securities lending, or other shadow banking activities, or when they 

offer products that have features that make them susceptible to runs. Through the Council’s authority 

to determine that nonbank financial companies shall be subject to supervision by the Federal Reserve 

and enhanced supervision and prudential standards, the orderly liquidation authority with respect to 

failing firms that could threaten financial stability, and the comprehensive regulation of the derivatives 

markets, regulatory agencies now have much better tools to address threats to financial stability posed 

by any particular insurer. Reforms of solvency regulation discussed in this Report, moreover, would 

further strengthen the supervisors’ ability to address risks posed by insurers to financial stability. 

Capital Adequacy. As discussed more fully in this Report, capital adequacy standards for insurers are a 

subject currently being evaluated by the domestic and international insurance regulatory community. 

State regulators, through the NAIC’s SMI initiative and in the EU-U.S. Insurance Project (see Box 4), 

are reviewing state-based RBC standards. Separately, but as a related matter, the IAIS ComFrame initiative will develop a quantitative capital standard for internationally active insurance groups. This Report’s 

recommendations encourage not only further work on this front, but also improved uniformity and 

oversight across jurisdictions with respect to discretionary practices, more robust regulation of captives 

and special purpose vehicles, and better oversight of accreditation processes. These additional measures 

will be important steps toward modernizing capital adequacy standards in insurance regulation. 

Meaningful and Consistent Consumer Protection. This Report identifies a number of areas for improving 

consumer protection. Areas such as producer licensing, product approval, and market conduct examinations are among the areas that have long been considered appropriate for improvement and modernization, particularly through establishment of uniform nationwide standards. This Report touches 

on these issues, and on others such as risk classification, rate regulation, natural catastrophes, and 

suitability for customers of annuities products. 

National Uniformity. A uniform system of insurance regulation can reduce unnecessary cost and burden. A 2009 study by McKinsey & Co. estimated that regulatory costs added as a result of the current 

system total $13 billion annually, $7.2 billion of which are borne by P/C insurers.84 Although many 

note that the states have taken significant steps towards improvement, the state regulatory system continues to suffer from a lack of uniformity. This Report has recognized uniformity as a central concern 

regarding the current system of insurance regulation in the United States and, throughout, the analysis 

and recommendations point to concrete measures to improve uniformity with respect to both solvency 

and market conduct regulation. 

84 McKinsey & Company, April 2009, supra.
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Consolidated Supervision. The Dodd-Frank Act introduces consolidated supervision of insurers in two 

different ways. First, to the extent an insurer or group is designated by the Council under Title I, its 

financial activities will be regulated as a consolidated entity. Second, in Title III, the Dodd-Frank Act 

eliminated OTS and turned oversight of federally chartered thrifts to the OCC, and made the Federal 

Reserve Board the supervisor of thrift holding companies at the consolidated level, including those 

with insurance subsidiaries or affiliates. 

Nevertheless, a substantial number of insurers are part of larger corporate groups that are not covered 

by either Title I or Title III of the Dodd-Frank Act. Accordingly, determining how best to introduce 

consolidated supervision has been an agenda item both for state regulators and international supervisors. Domestic efforts have met with mixed results, in part reflecting the inherent limits of state 

jurisdiction. This Report supports the state regulators’ efforts to improve consolidated supervision 

practices. The Report also provides recommendations for the short term, including enhancement of 

supervisory colleges. Particularly in light of the global nature of the activities of large insurance firms, 

this is an important area for continuing work. 

International Coordination. In Title V, the Dodd-Frank Act vests FIO with authority to coordinate and 

develop federal policy on prudential aspects of international insurance matters and to represent the 

United States at the IAIS. FIO today actively represents the United States in international fora, involvement that will continue to expand. At the IAIS, FIO serves on the Executive and Financial Stability 

Committees, and serves as Chair of the Technical Committee. FIO also serves on several of the IAIS 

subcommittees. FIO also consults and coordinates with state regulators and other federal agencies in 

connection with these activities. For example, FIO’s collaboration with state regulators has brought the 

EU-U.S. Insurance Project to a defined path forward. Insurers operating on both sides of the Atlantic 

have increasing certainty about the impact of regulatory developments, and supervisors in both jurisdictions have heightened awareness and understanding of the other’s regulatory regime. 

Efforts at international coordination must also continue apace because many aspects of the insurance 

sector are increasingly global and standard-setting activities will deeply affect oversight of the industry 

in both developed and emerging markets around the world. Moreover, inattention to global matters 

and discord among jurisdictions could lead to competitive disadvantages for U.S. firms. Accordingly, 

this Report contains recommendations specifically tailored to cross-border matters, such as reinsurance, which have important competitive and solvency implications. 
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VI. CONCLUSION

It is not enough to say that the U.S. system of insurance regulation should be improved and modernized – this is true in every regulatory framework. Financial services evolve with great pace, and regulators of every sector are challenged to remain current, to foster competitive markets, and to protect 

consumers. Insurance does not differ from banking, securities and commodities in this respect – the 

insurance sector and its national and international markets are in constant flux. 

This Report has identified some targeted and broad areas for which reform of the state-based system 

of insurance regulation is appropriate. Any reform proposal must also account for the threshold issue 

of how that reform will be achieved. Notwithstanding a decades-long debate about whether insurance 

should be regulated at the state or federal level, for the benefit of U.S.-based insurers and consumers, 

the debate is best reframed as one in which the question is where federal involvement is warranted, not 

whether federal regulation should completely displace state-based regulation. 

Insurance markets are increasingly global, and any structural reform proposal should be premised on 

objective analyses of current regulation, identification of subject matter areas genuinely in need of 

reform, and the inherent legal and practical limits of the states. While this Report does not propose a 

recommendation for every conceivable shortcoming of the insurance industry and its regulatory framework, it sheds light on areas in need of prompt modernization and improvement. 

With respect to prudential oversight, state-based regulation has largely evolved with the recognition 

that the ability of an insurer to pay a claim is the bedrock on which the U.S. insurance market is based. 

While not beyond reproach, and in need of specific reforms identified in this Report, state regulators 

have developed a system of entity-specific financial oversight that satisfies this most fundamental regulatory objective. States need to improve prudential oversight of insurers, but are working in that direction. FIO will monitor state regulatory developments, including those called for in this Report, and will 

present options for federal involvement as such options become necessary. 

Any system with 56 independent jurisdictions is inherently limited in its ability to regulate uniformly 

and efficiently. This remains true for the state-based system of insurance regulation in the United 

States. The impact of this lack of uniformity is felt acutely in both prudential matters and in certain areas of marketplace oversight. To address the inefficiencies and lack of uniformity in the state regulatory system, federal involvement will be necessary. The status quo, or a state-only solution, will not resolve 

the problems of inefficiency, redundancy, or lack of uniformity, or adequately address issues of national 

interest. This Report describes some of those areas where federal standards and intervention may be 

most beneficial. 

Working with all aspects of the insurance sector, including state regulators and policymakers, consumers and industry, FIO will recommend additional improvements to the U.S. system of insurance 

regulation that best integrate the interests of U.S. insurers and consumers. Whether, and to what 

extent, those improvements will require federal involvement will often depend upon the subject matter, 

circumstances, and ability and willingness of the states to resolve the underlying issue.